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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT
Under Section 13 or 15(d) of the Securities Act of 1934
For the Fiscal Year Ended June 30, 1999
ARTHUR TREACHER'S, INC.
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(Name of Small Business Issuer in Its Charter)
UTAH 34-1413104
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer
Identification No.)
7400 Baymeadows Way, Suite 300, Jacksonville, Florida 32256
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(Address of Principal Executive Offices) (Zip Code)
(904) 739-1200
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(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
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Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [_] No [X]
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $21,531,829
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Shares outstanding. 15,424,004
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State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange
Act.) $38,560,010
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Note: if determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
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PART I
Item 1. Description of Business.
The Company is a fast service seafood restaurant chain based in Jacksonville,
Florida. The Company's principal business is the operation, franchising,
ownership and development of "Arthur Treacher's Fish & Chips" fast food
restaurants. On December 31, 1999 the Arthur Treacher's system consist of 161
restaurants, consisting of 29 Company owned restaurants and 71 independently
owned and operated franchised locations and 61 franchise restaurants cobranded
with Miami Subs, Corp. ("Miami Subs"), Nathan's Famous Hot Dogs and Pudgie's
Famous Chicken. The restaurants are located in 13 states in the mid-western and
eastern United States as well as in Washington D.C. and the province of Ontario,
Canada. The Company's main product is its "Original Fish & Chips" product
consisting of fish fillets coated with a special batter prepared under a
proprietary formula, deep-fried golden brown and served with English-style chips
and two corn meal "hush puppies". The Company's other products include chicken,
shrimp, clams and an assortment of other seafood combination dishes.
(A) Background
The Company was originally founded in 1969 as Arthur Treacher's Fish & Chips,
Inc., a Delaware corporation. In 1979, Mrs. Paul's, Inc. ("Mrs. Paul's")
purchased Arthur Treacher's Fish & Chips, Inc. In 1982, Lumara Foods of America,
Inc. ("Lumara") acquired the assets of Arthur Treacher's Fish & Chips, Inc. from
Mrs. Paul's. Lumara sought bankruptcy protection in 1983. In December 1983,
Arthur Treacher's Inc., an Ohio corporation, entered into an agreement to
purchase the assets of Lumara, during Chapter XI bankruptcy proceedings. In
February 1984, Arthur Treacher's Inc., an Ohio corporation, merged into El
Charro, Inc., a Utah corporation, which consummated the acquisition of the
assets of Lumara and changed its name to Arthur Treacher's, Inc. On May 31,
1996, an investor group organized by Mr. Bruce Galloway, the current Chief
Executive Officer and Chairman of the Board, acquired control of the Company.
In August 1998 the Company commenced pursuing co-branding opportunities. On
August 13, 1998, the Company entered into a co-branding licensing agreement with
Miami Subs. Miami Subs offers fresh fast food including hot and cold submarine
sandwiches, cheesesteak sandwiches and various ethnic foods.
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(B) Corporate Restructuring Strategy
The Company seeks to focus on four key areas :
o Improve operating cash flow and profitability
o Franchise Expansion
o Co-Branding
o Retail Development
Restructuring Strategy
Management of the Company implemented a corporate restructuring plan to address
the financial condition of the Company in January 1999. The multi-faceted
corporate strategy is focused on the restructuring of real estate obligations,
improving same store operations, franchising and attracting capital or new debt.
Each facet of the strategy is geared to improving operations by selling certain
company owned restaurants that incur losses, increasing franchise sales and
cobranding and introducing a retail product line for major supermarkets chains.
As of October 30, 1999, the restructuring of real estate obligations by
franchising, selling and terminating selected leases was complete. The Company
owned and operated restaurants are concentrated within New York, New Jersey and
Pennsylvania. Existing Arthur Treacher markets in Ohio, Michigan, Maryland,
Washington D C, Florida and Ontario, Canada will be targeted for franchise
expansion. The cobranding program with Miami Subs, Nathan's Famous Hot Dogs,
Kenny Rogers Roasters, Pudgies Famous Chicken and other approved quick serve and
casual dining restaurant chains will continue to provide an additional source of
franchise revenue.
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The following chart describes the restructuring. The 29 remaining company owned
and operated restaurants are the traditional Arthur Treacher's Fish & Chip
restaurants.
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Restructuring Activity
for Company Owned Restaurants
Before June 30, 1999 September 26, 1999
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Restructuring Restructuring Restructuring
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Company
Restaurants Operated 63 42 29
Franchised restaurants 15 28
Sell Leases 3 3
Terminate Leases 8 8
Closed restaurants 6 1 1
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Total 69 69 69
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Franchise Expansion & Co-branding
The Company intends to focus on franchising the Arthur Treacher's Fish & Chips
brand restaurants and accelerate its cobrand expansion with Miami Subs, Nathans
Famous Hot Dogs, Kenny Rogers Roasters and Pudgies. The targeted territories for
franchise and cobrand expansion will include New York, New Jersey, Delaware,
Pennsylvania, Ohio, Michigan, Maryland, Washington D C, Florida and Ontario. The
Company will continue to capitalize on the strength of its brand equity building
franchise revenues by franchising and cobranding.
o Expansion in Previously Exclusive Territory
The Company has acquired the exclusive development rights from its Canadian
franchisee and has begun to market the Ontario territory. The company intends to
develop the Toronto market initially before expanding into other regions of
Ontario. The growth plan will primarily be franchise expansion with additional
emphasis on seeking cobrand partners with an established multi unit Canadian
concept.
o Co-branding with other concepts.
The Company seeks co-branding between two restaurant concepts when one concept
provides a product or serves a demographic group that is underserved by the
other. In addition, the Company will seek complementary concepts that offer
different products to the same customers during different parts of the day. The
Company intends to continue to pursue co-branding opportunities.
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As of November 1997, the Company entered into a management agreement with Miami
Subs as to one location and in August 1998, the Company entered into a co-brand
license agreement with Miami Subs to put a limited Arthur Treacher's menu in
Miami Subs units. As of December 31, 1999, 56 Miami Sub franchisees have
co-branded with Arthur Treacher's.
The Company is also cobranding with Nathan's Famous Hot Dogs and Pudgie's Famous
Chicken. As of December 31, 1999, four Nathan's restaurants and one Pudgie's
were operating under a cobrand agreement with Arthur Treacher's.
Arthur Treacher's receives royalties and initial franchise fees under each
cobrand franchise agreement. The Company anticipates opening additional co-brand
locations during the current fiscal year with each of its cobrand partners.
o Corporate Franchisees
The Company intends to develop joint programs with new corporate franchisees for
regional expansion opportunities in certain selected markets. This program will
entail a corporate sponsor for a particular region based upon metropolitan
population densities. A region would typically be large enough to cover an area
that could accommodate ten or more store locations. The Company anticipates that
a regional representative franchise agreement would be executed with the
corporate franchisee providing it with rights to a specified region and to
support from the Company in order to develop the area within certain guidelines
established by the Company relating, among other things, to a minimum number of
restaurants to be opened within particular time periods. The Company also
intends to grant new franchises to operators of single restaurants. There can be
no assurance, however, that suitable franchisees can be located or that regional
representative franchise agreements will be reached at terms acceptable to the
Company.
The Company estimates the cost of opening a new Company owned restaurant at
between $50,000 and $200,000 per restaurant (assuming the purchase, not lease,
of new equipment), depending upon factors such as the size of the restaurant,
the lease, remodeling cost and local construction costs.
Co-branding the Arthur Treacher's menu into another restaurant concept entails a
conversion cost of approximately $25,000 to $35,000 depending on the existing
restaurant equipment being used by the co-brand partner.
By standardizing the construction and equipment procurement process of its
restaurant network, the Company believes that it could develop the economies of
scale in the design and site selection process. A supplementary benefit of such
an expansion program could include proposals to arrange for regional or national
equipment leasing and financing programs and the use of national or regional
contractors to provide support for franchisees wishing to expand.
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There can be no assurance that such programs will be reached at terms acceptable
to the Company.
The Company's proposed expansion and store renovations will be dependent on,
among other things, attracting quality franchise candidates, the availability of
suitable restaurant sites, negotiation of acceptable lease terms, timely
development of such sites, obtaining landlords' consents to renovations,
constructing or renovating restaurants, hiring of skilled management and other
personnel, the general ability to successfully manage growth (including
monitoring restaurants, controlling costs and maintaining effective quality
controls) and the availability of adequate financing. In the case of franchised
restaurants, the Company will be substantially dependent on the management
skills of its franchisees
Marketing, Promotion and Advertising
Core menu items
Batter-dipped fish, chicken and shrimp continue to account for more than 75% of
the Company's annual sales during the fiscal year ended June 30, 1999. Arthur
Treacher's has built a strong brand awareness over the past 30 years with its
core menu and anticipates increasing the marketing and promotion of the
batter-dipped products. The Company's restaurants are designed to produce the
batter-dipped products easily. Increasing the sales of already high volume
products will improve product rotation and help ensure hot, fresh food for
customers.
The Company believes that batter-dipped food is a strong focus for the menu
because, in part, batter-dipped food cannot be prepared easily at home. Most
households do not have a deep fryer and a recipe for batter.
Marketing strategies
Mall based stores are critical to the Company's success. Seventy percent of the
Arthur Treacher systemwide revenue for the fiscal year ended June 30, 1999 was
mall based. Therefore, marketing strategies are tailored to generate business in
malls. If the tactics are feasible for freestanding stores, the marketing
approach will expand to the freestanding markets. Certain promotions developed
for freestanding stores will not necessarily be successful in the mall
locations. Freestanding locations can benefit substantially from external media
(print, radio, television, direct mail and out of home). Purchasing external
media to drive customers to a mall food court and to an Arthur Treacher's
restaurant in that food court becomes cost efficient when the concentration of
stores can adequately support the marketing cost of the external media. The
geographic distribution of the Company's mall based and free standing stores
permits the Company to design marketing programs for each region. Most of the
Company's freestanding and mall locations are in separate markets. Northeast
Ohio and Central Pennsylvania have most of the freestanding stores while the
mall based Arthur Treacher's are located primarily in the
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New York to Philadelphia corridor and Florida.
A local marketing training program for managers of Arthur Treacher's restaurants
located in food courts has been implemented. One day training classes have been
held for the managers. The program is designed to enable and empower managers to
market their store within the confines of the mall by capturing new customers,
use fewer discounts and improve frequency of visits. Promotional tools have been
provided to the managers. Managers are working with their supervisors and the
marketing department to create marketing plans tailored to the needs of each
store. Managers of freestanding locations are also being trained in local
marketing techniques which are designed to reflect the different needs of
freestanding stores.
(C) Franchises
As of December 31, 1999, the Company had 132 independently owned and operated
franchised locations consisting of 71 traditional Arthur Treacher restaurants
and 61 cobranded restaurants. The Company has three options for franchises:
individual stores, cobranding and area development. Pursuant to its franchise
agreement, the Company provides its franchisees with a method of operation,
including trade secrets, technical knowledge, a supply distribution program and
standards for customer service, quality control, decor, layout, signs and
accounting systems. The Company also provides centralized advertising and
cooperative advertising programs and an initial training program, which is
required for franchisees. Each franchisee is required to spend a minimum of
three percent of monthly gross sales on advertising. In addition, each
franchisee must purchase certain private label, proprietary food, paper
supplies, equipment and signage from Company approved suppliers and
distributors.
The Company does not select restaurant sites for franchisees, but all sites are
subject to the Company's approval. The Company also requires that its
franchisees name the Company as an additional insured party on their property
and casualty insurance policies and that vendors provide subrogation to the
Company with respect to their product liability insurance.
Pursuant to the Company's standard franchise agreement, which is incorporated in
its Uniform Franchise Offering Circular, the initial franchise fee for a one
unit franchise is $19,500. The fee for each additional franchise declines
thereafter. The fee for an area development franchise is $69,500. These
franchise fees do not include the costs associated with the operation of the
restaurant, including food, supplies, labor, equipment, occupancy costs and
taxes.
Cobranding fee arrangements may vary depending on the growth potential,
commitments and development schedules agreed upon with the cobrand partner.
Each franchisee is subject to a royalty fee of a maximum of six percent of the
franchisee's gross sales, net of sales taxes and certain other adjustments,
based upon sales reports at the end of each calendar month. In the fiscal year
ended June 30, 1999, the Company received a total of
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$355,776 in franchise fees and royalty income. Most franchisees, pay royalties
at a rate substantially lower than six percent of gross sales, with an average
royalty of about three percent. Reduced royalty fees have been granted by the
Company for certain older franchisees and for franchisees who operate multiple
units.
As of December 31, 1999, franchisees operating eight restaurants have either
been notified of being in default for non-payment of royalties or are more than
90 days in default on royalty payments. The inability of the Company's
franchisees to make payments on a timely basis will adversely affect the
Company's liquidity and its operations.
(D) Suppliers and Pricing
Seafood prices, particularly the price of pollack, are subject to supply
problems due to environmental and economic factors. The Company is developing
measures to minimize the effect on the Company.
The Company's principal product, "Fish and Chips," includes pollack. Other
species are being tested as alternatives due to supply, price and availability.
The Company and franchisees utilize one supplier for pollack and one supplier
for shrimp. For the fiscal year ended June 30, 1999, purchases of pollack and
shrimp accounted for approximately 20% and 7% of the Company's operating
expenses, excluding occupancy costs, respectively. Such supplies and prices are
subject to volatility. Seafoods of the quality sought by the Company tend to
trade on a negotiated basis depending upon supply and demand at the time of
purchase. Supply and price can be affected by multiple factors, such as weather,
politics and economics in the producing countries. An increase in the prices of
seafood, particularly pollack, could have an adverse effect on the Company.
The Company maintains relationships with certain seafood vendors in an effort to
obtain seafood of the quality and in the quantity demanded by the Company's
customers. These relationships enable the Company to maintain its supply of fish
as well as affording the Company some price stability. The Company has sought to
mitigate the effects of price volatility by entering into agreements with its
principal fish suppliers to provide fixed prices for seafood products during the
six months to one year duration of the contracts. Such fixed price agreements
also help ensure the Company's supply of fish and enable the Company to reduce
its supply costs. Although the Company anticipates that the agreements will be
renewed on substantially the same terms as the current agreements, there can be
no assurance that the new terms will not be more costly. However the Company
believes that alternate suppliers of pollack and other seafoods are available if
the prices of pollack or other seafoods increase substantially. Management also
intends to take advantage of changing technologies with respect to the "farming"
and breeding of selected species of fish and seafood products, and currently
purchases some fish products that are "farmed."
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The Company uses many individual suppliers for many of its significant
non-seafood items. For example: cups, potatoes, chicken, shortening and
proprietary fish batter are each purchased from different individual suppliers
under oral and written agreements which set the price for one year. All of the
Company's supplies are delivered by such suppliers to one distributor who
services the Company's restaurants from three distribution centers. Any
disruption in supplies from such suppliers could temporarily have an adverse
effect on the Company's operations, although the Company believes that the
supplier could readily be replaced. Except with respect to the Company's
proprietary products, franchisees can purchase such products from other
suppliers or distributors, subject to the Company's prior approval.
(E) Competition
The restaurant business is highly competitive with respect to price, service,
location and food quality and is generally considered to be a mature industry.
Competition in the industry can be expected to increase. The industry is
affected by changes in consumer eating habits and preferences, local, regional
and national economic conditions, demographic trends, automobile traffic
patterns, government regulation, employee availability and commodity and
operating cost fluctuations, many of which are beyond the Company's control. Any
unplanned or unanticipated changes in these factors could adversely affect the
Company.
There are numerous well-established competitors in the operating areas of the
Company. Restaurants operated or franchised by the Company compete directly not
only with quick service restaurants ("QSRs"), but also with moderately priced
family and specialty restaurants. Significant competitors include fast food
seafood restaurants such as Long John Silvers and Captain D's, casual dining
restaurants with a seafood emphasis such as Red Lobster and Landry's, and other
chains that serve seafood or chicken, or both.
The Company's primary competitors in the fast service seafood restaurant
business are Long John Silvers and Captain D's. Both competitors have company
owned and franchised restaurant operations in certain regions of the United
States. Long John Silvers is the largest competitor and Captain D's, a wholly
owned subsidiary of Shoney's, Inc. has a strong regional presence in the
southeastern United States. The amount of competition varies among the Company's
principal regional markets. Both Captain D's and Long John Silvers compete
directly with the Company in Ohio and Pennsylvania, although the level of
competition is highest in several Pennsylvania markets. Long John Silvers
competes directly with the Company in several of its markets in Florida.
In Ontario, the Company has significant direct competition from independent fish
and chips restaurants, but less direct competition from other major fast service
seafood chains. Many of the Company's competitors possess substantially greater
financial, marketing, personnel and other resources than those of the Company.
Such competitive pressures limit the Company's ability to increase food and
beverage prices and thus may limit the extent to which the Company
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and its franchisees can offset certain costs of doing business. There can be no
assurance that well-established competitors will not place additional
restaurants in close proximity to those of the Company and its franchisees.
The Company also faces vigorous competition from other QSR chains in attracting
and retaining suitable franchises. The Company plans to increase its number of
franchised restaurants but there can be no assurance that it will be able to
attract and retain suitable franchisees.
The Company has developed a concentration of restaurant locations in the food
courts of regional shopping malls. The competition in the malls typically
consists of the seven to thirteen different restaurant concepts in each food
court. Each food concept generally serves a distinctive menu item which may
compete, directly or indirectly, with the Company. There can be no assurance
that the Company will continue to be able to compete effectively with such food
concepts. Top competitors in food courts include Sbarros, Chik-fil-a, Philly
Stations, a variety of small chains featuring Japanese, Chinese, Cajun and other
ethnic foods. Major QSR chains such as McDonald's, KFC, Burger King, Wendy's,
and Taco Bell are opening in food courts. The major chains benefit from broad
consumer awareness generated by broadcast media. These concepts can dominate a
food court.
(F) Seasonality
The Company derives a significant portion of its sales during the
November/December (Christmas) and March/April (Easter) seasons, which are
reflected in the Company's operating results for the second and third quarter.
These seasonal effects are dependent upon the general retailing environment and
customers' preference to shopping malls. Weather can have a significant affect
on shopping in Northern climates. During the Fiscal Years ended June 30, 1999
and June 30, 1998, 86% of the Company's net sales came from Northern states.
These areas can be significantly impacted by weather during December, January
and February. Approximately 70% of the Company's net sales is derived from
shopping malls. The Company derives approximately 15% of its total net sales
from operations of the stores located in shopping malls during the holiday
season.
(G) Employees
At January 31, 2000, the Company had approximately 350 employees. A total of
approximately 285 employees are paid on an hourly basis and 65 employees receive
a salary. Six of the Company's employees perform executive functions. Most of
the Company's employees are employed at the Company's restaurants. The Company
believes that the number of persons employed is adequate to conduct the
Company's current level of operations.
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(H) Government Regulation
The Company's business is subject to extensive federal, state and local
government regulation, including regulations relating to franchising, public
health and safety, zoning and fire codes. The failure to obtain or retain food
or other licenses would adversely affect the operations of the Company's
restaurants.
The Company is subject to federal and state laws, rules and regulations that
govern the offer and sale of franchises. The Company is also subject to a number
of state laws that regulate certain substantive aspects of the
franchisor-franchisee relationship. If the Company is unable to comply with the
franchise laws, rules and regulations of a particular state, relating to offers
and sales of franchises, the Company will be unable to engage in offering or
selling franchises in such state. The Company believes it is in compliance with
such laws, rules and regulations and has not been cited for non-compliance. The
Company is not currently subject to any investigation by any federal or state
regulatory authority.
On a national level, the FTC requires the Company to furnish prospective
franchisees with a disclosure document which complies with the FTC's Trade
Regulation Rule (the "FTC Rule"). The Company's current FTC disclosure document
is effective for use in 37 states, and the District of Columbia, that do not
require registration of disclosure documents. However, in the 13 remaining
states, the Company is required to register a state-specific document and
receive an effective registration notice prior to the commencement of sales of
franchises in such states. The Company is qualified to sell franchises in
selected states that requires a state specific document although the Company
believes that it could register in all registration states if it chose to offer
franchises in such states.
The Company will be required to update its FTC disclosure document to reflect
the occurrence of material events. The occurrence of any such events may, from
time to time, require the Company to modify its disclosure documents within 90
days or stop offering and selling franchises until the document is so updated.
There can be no assurance that the Company will be able to update its disclosure
document or become registered to offer or sell franchises in certain states
consistent with its expansion plans or that the Company will be able to comply
with existing or future franchise regulations in any particular state, any of
which could have an adverse effect on the Company.
(I) Trade and Service Marks and Trade Secrets
The Company believes that the "Arthur Treacher's" and the "Arthur Treacher's
Fish & Chips" trade and service marks, and other marks may have significant
value and are important to the marketing of its restaurants and products. All
are registered with the United States Patent Office. The Company registered
"Arthur Treacher's Seafood Grille" as a trade and service mark in 1998. The
Company's principal "Arthur Treacher's" and "Arthur Treacher's Fish and Chips"
trade and
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service marks are subject to renewal for 10 year periods upon application to the
United States Patent Office between 2007 - 2009. The other trade and service
marks are subject to renewal for 10 year periods on various dates between 2000 -
2010. Upon expiration of each period, the marks may be renewed for successive 10
year periods. The Company also registered the trademark "Arthur Treacher's Fish
& Chips" in Canada on July 23, 1999. This trademark is subject to renewal every
15 years. There can be no assurance, however, that the Company's trade and
service marks do not, or will not, violate the proprietary rights of others,
that the Company's trade and service marks would be upheld if challenged or that
the Company would not be prevented from using its trade or service marks. Any of
the aforementioned instances could have a material adverse effect on the Company
and its franchisees. The Company's trade and service marks have not been and are
not subject to any material challenges and the Company has acted to vigorously
defend the marks in several isolated instances where alleged infringement has
occurred.
The Company utilizes a proprietary batter mix in connection with the preparation
of its seafood products. There can be no assurance that such recipe will not be
copied by a competitor and that the Company's business will not be adversely
affected.
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Item 2. Description of Property.
The Company's principal executive offices are located at 7400 Baymeadows Way,
Jacksonville, Florida 32256 (904-739-1200). The Company rents its 5,100 square
feet of headquarters space for an annual rent of approximately $96,000 pursuant
to a lease which expires in 2001.
The Company's 42 restaurants include 11 restaurants located in premises leased
by the Company, 31 located in premises leased by MIE, a wholly-owned subsidiary
of the Company. In addition, with respect to five leases, the Company either
guarantees the obligations of franchisees or leases the properties and subleases
them to franchisees. The Company's free standing restaurants are each
approximately 2,000 square feet and the Company's restaurants located in malls
are each approximately 400 to 1,100 square feet.
The leases have remaining terms ranging from one to 18 years. Many of the leases
contain renewal options for periods of five to 10 years. The Company is
reviewing whether to continue to operate any marginal restaurants acquired in
the MIE Acquisition and to renegotiate the terms of each restaurant lease upon
the expiration of each lease. The following chart sets forth the expiration
dates of the terms of (i) the leases of Company owned restaurants, and (ii) the
Company's leases which are subleased to franchisees and leases of franchisees
which are guaranteed by the Company.
Leases Subject
to Guarantees
Number of Leases or Subleases Expiration Date
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2 1 2000
5 0 2001
10 0 2002
12 3 2003
7 0 2004
7 0 Thereafter
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Item 3. Legal Proceedings
ATAC Corporation and Patrick Cullen v. Arthur Treacher's, Inc. and James
Cataland, Case No. 1:95CV 1032, In the U.S. District Court, Northern District,
Ohio Eastern Division; filed May 9, 1995. On November 16, 1994, Arthur
Treacher's terminated the agency agreement of a Regional Development
Representative, ATAC Corporation, on the grounds that ATAC breached the
agreement by assigning the agency agreement to a third party without the consent
of Arthur Treacher's. ATAC claims that the Company was aware of and consented to
the third-party assignment. The Company is unaware of any document signed by a
properly-authorized representative of the Company formally authorizing or
consenting to the assignment. On May 9, 1995, ATAC filed the action and alleged
that the Company terminated the contract without cause, tortuously interfered
with other business relationships, committed wrongful conversion of the
territory and committed restraint of trade and price-fixing, breach of contract,
fraud, and violations of RICO. ATAC originally demanded a minimum of $2,750,000
in compensatory damages and $6,000,000 in punitive damages. In response to the
original complaint, the Company filed a motion to dismiss all of the claims. In
addition, the Company filed a counterclaim against ATAC seeking a Declaratory
Judgment that ATAC does not have a service contract with the Company in certain
areas which the Company does business, that ATAC has committed breach of
contract and that the Company is entitled to indemnification for previous
lawsuits which have occurred because of the actions of ATAC on behalf of the
Company. ATAC has twice amended the claims and allegation of the original
complaint. In the Third Amended Complaint, ATAC asserts claims against the
Company and the Company's former President, James Cataland, for fraud, breach of
contract, tortuous interference with contract, violations of the Ohio Business
Opportunity Act, violations of the Ohio Consumer Sales Practices Act and breach
of fiduciary duty. ATAC seeks in excess of $10,000,000 in compensatory,
punitive, and statutory damages from the Company. In response to the Third
Amended Complaint, the Company in 1997 filed a Motion to Dismiss ATAC's claims
for breach of fiduciary duty and under the Consumer Sales Practices and Business
Opportunity Acts. The Company also requested that the district court dismiss the
claim against the Company's former President. The Company in 1998 filed Motions
for Summary Judgment on behalf of itself and the Company's former President with
respect to all of ATAC's claims (except breach of contract) and requested that
the court refer the remaining contract claim to binding arbitration. The Court
granted the Company's Motion to Stay the lawsuit pending arbitration and the
ruling is presently the subject of an appeal to the Sixth Circuit Court of
Appeals. The parties submitted briefs to the Sixth Circuit between July and
October of 1999. The Sixth Circuit should hand down the decision within the next
few months.
The Company originally believed that the lawsuit was an attempt by plaintiffs to
regain the territory by forcing the Company to defend expensive litigation at
significant expense and that the plaintiffs' claims are without merit. The
Company now understands that ATAC solely seeks damages from the Company. The
Company still believes that ATAC's claims are meritless. The
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Company's attorneys have indicated that they intend to vigorously defend the
Company from the claims made by ATAC and pursue any counterclaims.
In opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the Company's consolidated results of
operations of financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The following table sets forth the high and low prices for the periods indicated
as reported by the National Daily Quotation Service, Inc. between dealers and do
not include retail mark-ups, mark-downs, or commissions and do not necessarily
represent actual transactions, as reported by the National Association of
Securities Dealers Composite Feed or other qualified inter-dealer quotation
medium. As of April 17, 2000, the closing bid price was $2.00 per share.
Low High
--- ----
1998 Fiscal Year:
First Quarter 3.000 3.500
Second Quarter 3.000 4.250
Third Quarter 3.125 4.000
Fourth Quarter 2.000 3.563
1999 Fiscal Year:
First Quarter 0.563 2.625
Second Quarter 0.594 1.125
Third Quarter 0.375 0.969
Fourth Quarter 0.313 0.813
The Common Stock is recorded on the NASD Bulletin Board with the symbol ATCH. As
of June 30, 1999, the number of record holders of the Company's Common Stock was
551.
Dividends
In November and December 1997, the Company consummated a private placement with
respect to equity units consisting of shares of its Series C Preferred Stock and
warrants to purchase shares of common stock for aggregate proceeds of $990,000.
The Company sold 9,900 shares of Series C Preferred Stock with warrants to
purchase 148,500 shares of common stock attached.
16
<PAGE>
The preferred stock is not convertible, but may be redeemed at the option of the
Company at a redemption price of $100 per share plus accrued and unpaid
dividends, at any time. The holders of the preferred stock are entitled to a
cumulative dividend of 10 percent per annum, payable semi annually, if and when
the Board declares a dividend. On September 28, 1998, the Company sold 4,000
shares of Series D preferred stock and Common Stock Purchase Warrants with gross
proceeds of an aggregate amount of $400,000. The preferred stock is convertible
into 400,000 shares of common stock.. The holders of the preferred stock are
entitled to a cumulative dividend of 15 percent per annum, payable semi
annually, if and when the Board declares a dividend.
To date, the Company has not paid any dividends on its Common Stock or Preferred
Stock. The payment of dividends, if any, in the future is within the discretion
of the Board of Directors and will depend upon the Company's earnings, its
capital requirements and financial condition, and other relevant factors. The
Company does not intend to declare any dividends in the foreseeable future, but
instead intends to retain all earnings, if any, for use in the Company's
business operations. No dividends may be distributed with respect to the Common
Stock so long as there are accrued and unpaid dividends on the Series A and
Series C Preferred Stock. The amount of accumulated and unpaid dividends on the
Series A Preferred Stock, Series C Preferred stock and Series D Preferred Stock
was approximately $212,970 as of June 30, 1999.
Item 6. Management's Discussion and Analysis or Plan of Operation.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995.
Information set forth herein contains "forward-looking statements" which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy. No
assurance can be given that the future results covered by the forward-looking
statements will be achieved. The Company cautions readers that important factors
may affect the Company's actual results and could cause such results to differ
materially from forward-looking statements made by or on behalf of the Company.
Such factors include, but are not limited to, changing market conditions, the
impact of competitive products, pricing and acceptance of the Company's
products.
Overview
The Company's principal sources of revenues are from the operations of the
Company owned restaurants and the receipt of royalties from franchisees. The
Company's cost of sales includes food, supplies and occupancy costs (rent and
utilities at Company owned stores). Operating
17
<PAGE>
expenses include labor costs at the Company owned stores and advertising,
marketing and maintenance costs. Franchise services and selling expenses include
fees payable to regional representatives and their expenses and the salary of
the Company's Director of Franchise Services. General and administrative
expenses include costs incurred for corporate support and administration,
including the salaries and related expenses of personnel at the Company's
headquarters in Jacksonville, Florida (except the Director of Franchise
Services), the costs of operating the headquarters offices (rent and utilities)
and certain related costs (travel and entertainment).
Results of Operations
The following discussion includes the following periods: (i) the fiscal year
ended June 30, 1999 ("Fiscal 1999") and (ii) the fiscal year ended June 30, 1998
("Fiscal 1998"). The financial results of the Company have been audited as of
the full fiscal years ended June 30, 1999 and June 30, 1998.
Fiscal 1999 and Fiscal 1998
The Company's reported total revenues of $21,531,829 for Fiscal 1999, a decrease
of $1,454,933 or 6.3%, compared to Fiscal 1998. The decrease in total revenues
was generally a result of the restructuring activity which reduced the company
owned restaurants from 62 operating restaurants to 42 by June 30, 1999. Also
contributing to the decrease in total revenues was a reduction in couponing and
discounting of $1,133,356 when compared to the same period last year and a same
store sales decline of 6.2% for restaurants operated a minimum of 12 months when
compared to the same period last year.
Net restaurant sales (defined as gross restaurant sales less coupons, promotion
cost and discounts) decreased 3.1% or $626,566 to $19,576,361 compared to the
same period last year of $20,202,927 generally a result of the restructuring
activity. Same store net restaurant sales for stores operated a minimum of 12
months decreased $1,166,425 or 6.2% for Fiscal 1999 compared to Fiscal 1998.
Franchise and royalty income increased $276,063 or 39.7% to $971,610 for Fiscal
1999 primarily due to the co-brand expansion program with Miami Subs. The
co-brand expansion program with Miami Subs produced $ 28,765 in royalty income
and $ 57,500 in initial franchise fees for Fiscal 1999, compared to zero in the
same period last year.
Cost of sales from restaurant operations for Fiscal 1999 increased by .2% to
34.8% on net restaurant sales compared to 34.6% for Fiscal 1998. The increase in
cost of sales percentage is primarily a result of low sales volumes in many of
the restaurants subsequently sold during the restructuring. The Company's total
operating expenses increased $1,473,270 or 5.9% to $26,571,148 for Fiscal 1999,
as compared to $25,097,878 for Fiscal 1998. Of the increase
18
<PAGE>
$2,036,955 or 138.3% of the increase is attributed to the recognition of an
asset impairment charge as required by SFAS No. 121" Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
Discontinued operations and other non-recurring cost increased by $576,217 or
117.3% to $1,067,446 of which $878,785 was a result of losses and write-downs
incurred from the new concept development of the seafood grilles and co-branded
restaurants operated by the Company. These stores have been sold or the leases
have been terminated during the restructuring.
Interest expense decreased $16,959 or 8.8% to $175,728 for Fiscal 1999, as
compared to $192,687 for Fiscal 1998. The decrease in interest expense was a
function of paying down debt financing for past acquisitions and the natural
expiration of various debt.
Depreciation and amortization decreased $11,035 or .9% to $1,204,321 for Fiscal
1999, as compared to $1,215,356 for Fiscal 1998. Included in Fiscal 1998
depreciation was an asset impairment write-down of $110,000 in accordance with
FASB 121. With the $110,000 omitted from Fiscal 1998, depreciation and
amortization actually increased $98,965 or 9.0% to $1,204,321 for Fiscal 1999,
as compared to $1,105,356 for Fiscal 1998. The increase was primarily driven by
new store construction.
The undeclared preferred stock dividends increased $42,283 or 70.3% to $102,390
in Fiscal 1999 compared to $60,107 in Fiscal 1998. The increase is primarily
attributable to the Series D Preferred Stock issued in September 1998.
As a result of the "asset impairment write-down", discontinued operations of the
"Seafood Grilles" and co-branded restaurants and other non recurring cost, all
combined for net losses of $3,104,401. The Company's net loss (before preferred
dividends) increased $3,078,024 or 111.2% to $5,846,719 for Fiscal 1999, as
compared to a net loss (before preferred dividends) of $2,768,695 for the Fiscal
1998.
Fiscal 1998 and Fiscal 1997
The Company's reported total revenues of $22,986,762 for Fiscal 1998, ended June
30, 1998, an increase of $5,211,103 or 29.3%, compared to the year ended June
30, 1997 (Fiscal 1997). The increase in sales include the operating results of
the restaurants from the Company's M.I.E. division for all of Fiscal 1998,
compared to the 31 weeks of operation for Fiscal 1997.
The most significant increase from revenues came from net restaurant sales
(defined as gross restaurant sales less coupons, promotion cost and discounts)
which increased 25.9% or $4,156,236 to $20,202,927 compared to the same period
last year of $16,046,691. The increase was attributable to the net restaurant
sales generated by the M.I.E. division for a full 52 week period ended Fiscal
1998, compared to the post acquisition 31 week period of operation for the
19
<PAGE>
period ended Fiscal 1997.
Franchise and royalty income decreased 31.8% or $154,316 to $330,569 for Fiscal
1998 primarily due to the acquisition of M.I.E. Hospitality, Inc., the Company's
former 32 restaurant franchisee and several other franchise locations. Regional
representative fees decreased in conjunction with the decline in royalty revenue
compared to the same period last year. Overall, comparable store sales for
restaurants operated a minimum of 12 months decreased by 6.6% in Fiscal Year
1998 compared to Fiscal Year 1997.
Cost of sales from restaurant operations improved by 1.1% to 34.6% on net
restaurant sales for Fiscal Year 1998, as compared to 35.7% for the same period
last year. The Company's total costs and expenses increased 27.0% or $5,399,318
to $25,097,878 for Fiscal Year 1998, as compared to the same period last year.
Of the increase $4,945,806 or 91.6% of the increase was attributed to cost and
expenses incurred by the M.I.E. division from July 1 through November 26, 1997.
Additional costs incurred in Fiscal Year 1998 was a function of the acquisition
of three additional restaurants during the fiscal year.
Other non-recurring cost increased by $512,204 of which $419,417 was attributed
to the professional fees and due diligence expenses associated with the proposed
Seattle Crab Company and Miami Sub's Corporation acquisitions, which were
subsequently terminated.
Interest expense increased 18.1% or $29,557 to $192,687 for Fiscal Year 1998, as
compared to $163,130 for the same period last year. The increase in interest
expense was a function of increased debt financing for recent acquisitions, new
store construction and renovations. Depreciation and amortization increased
67.6% or $490,388 to $1,215,356 for Fiscal Year 1998, as compared to $724,968
for the same period last year. This increase was primarily driven by
acquisitions, new store construction and renovations and a write-down of
$110,000 in accordance with FASB 121.
The undeclared preferred stock dividends increased $51,387 in Fiscal Year 1998
primarily due to the issuance of Series C Preferred Shares in November 1997.
As a result of the foregoing, particularly the increase in depreciation and
amortization and non recurring cost, the Company's net loss (before preferred
dividends) increased 33.2% or $689,673 to $2,768,695 for Fiscal Year 1998, as
compared to a net loss (before preferred dividends) of $2,079,022 for the Fiscal
Year 1997.
20
<PAGE>
Liquidity and Capital Resources
The Company has financed its operations principally from revenues derived from
Company owned restaurants, franchise income and private placements of equity and
debt. The Company has raised approximately $12,000,000 in equity and debt since
May 1996, of which $3.3 million of equity and debt has been raised since
December 1997.
<TABLE>
<S> <C> <C>
Preferred Stock "Series C" December 1997 $ 990,000
Warrants exercised Dec 1997 - April 1998 $ 60,400
Common Stock June 1998 $ 438,315
Private Placement of Promissory Notes and Warrants September 1998 $ 200,000
Preferred Stock "Series D" September 1998 $ 400,000
Common Stock March 1999 $ 110,000
Promissory Notes and Warrants May 1999 - February 2000 $ 1,137,000
-------------
$ 3,335,715
</TABLE>
The management of the Company has reduced certain costs by renegotiating various
vendor contracts and continues to seek opportunities to reduce the Company's
operating costs. The Company engages in contract negotiations with certain
suppliers to reduce the Company's cost of goods sold and improve the Company's
liquidity. The Company's most significant supplier contract was completed in
December 1998 relative to the Company's soft drink product offerings. The
Company received in excess of $625,000 in cash from its new soft drink supplier
during the three months ended December 27, 1998. Such proceeds were used to
defray the cost of switching vendors and promotional cost incurred to integrate
the new product line into the Company's menu. Any excess proceeds will be
amortized into income over a two year period. The new vendor is providing menu
board design leadership, menu board financing and marketing support in various
phases of core product promotions in addition to soft drink promotions.
The Company's current liabilities exceeded its current assets by $3,733,044 at
June 30, 1999 compared to $2,443,782 at June 30, 1998. The Company had cash and
short-term investments of $165,459 at June 30, 1999 compared to $909,636 at June
30, 1998. During Fiscal 1999, the Company experienced negative cash flow which
has adversely affected its liquidity. Such negative cash flow resulted primarily
from operating losses related to the "Seafood Grille" concept in the Detroit,
Florida and New York metropolitan markets, expenses related to the construction
of new restaurants in the New York City area, legal and lease obligation
settlements and the professional fees and due diligence expenses associated with
the proposed Seattle Crab Company and Miami Subs Corporation acquisitions, which
were subsequently terminated. The Company became in arrears with respect to
certain leases because of poor performance by stores in those locations. The
Company had also incurred indebtedness in connection with (i) the conversion of
past due amounts under certain leases to indebtedness and (ii) the repurchase of
certain franchises, but several of such restaurants were unable to generate
sufficient revenues to repay the indebtedness.
21
<PAGE>
The Nasdaq Stock Market, Inc. delisted the Company's Common Stock from the
NASDAQ Small Cap Market on February 10, 1999 because the Company failed to
comply with Nasdaq's compliance criteria regarding minimum net tangible assets
and minimum bid price. The Company's common stock became listed on the OTC
Bulletin Board effective February 11, 1999. The delisting from NASDAQ could
adversely affect the Company's ability to raise additional capital.
The Company has reduced administrative, personnel and certain occupancy costs
during the fiscal year ended June 30, 1999 and seeks opportunities to reduce the
Company's operating costs.
The Company implemented a restructuring strategy in January 1999 which is
focused on improving cash flow and profitability by franchising or selling
certain company owned restaurants, franchise sales, cobranding and introducing a
retail product line for major supermarkets chains. As of October 1999, the
restructuring of real estate obligations by franchising, selling and terminating
selected leases was completed. As a result of the spin-off of selected leases,
losses typically incurred by certain locations have been eliminated, thus
improving cashflow and profitability. financial improvement
The implementation of the strategy has improved the operating cash flow and
profitability of the Company as illustrated in the financial summary below.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Statement of Operations
For Six Months Ended
( unaudited )
Dec 26, 1999 Dec 27, 1998 Dec 28, 1997
(in thousands) (unaudited)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Revenue $ 7,486 $ 11,298 $ 12,185
Net Loss ( 273) ( 1,289) ( 602)
Adjustments
Add: Depreciation & Amortization 391 594 546
Interest 83 79 178
------- ---------- -----------
EBITDA $ 201 $( 616) $ 122
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
EBITDA - Earnings before Interest, Taxes, Depreciation and Amortization
On September 30, 1999, the Company secured 12% promissory notes which generated
$289,000 from certain shareholders and board members. Interest accrues at a rate
of 12% per annum. In addition, the debt and interest is convertible into
1,541,333 shares of common stock at $.21 per
22
<PAGE>
share on September 30, 2000. Also 481,667 warrants are attached to this debt at
an exercise price of $.30 per share, which warrants are exercisable through
September 30, 2004.
On October 21, 1999, the Company secured 12% promissory notes which generated
$221,000 from certain shareholders and board members. Interest accrues at a rate
of 12% per annum. In addition, the debt and interest is convertible into
1,420,714 shares of common stock at $.21 per share on October 21, 2000. Also
368,333 warrants are attached to this debt at an exercise price of $.30 per
share, which warrants are exercisable through October 21, 2004.
On December 1, 1999, the Company secured 12% promissory notes which generated
$50,000 from Bruce Galloway the Company's CEO and Chairman of the Board.
Interest accrues at a rate of 12% per annum. In addition, the debt and interest
is convertible into 200,000 shares of common stock at $.28 per share on December
1, 2000. Also 65,789 warrants are attached to this debt at an exercise price of
$.38 per share, which warrants are exercisable through December 1, 2004.
On January 5, 2000, the Company secured 12% promissory notes which generated
$50,000 from Skuli Thorvaldsson, a Director of the Company. Interest accrues at
a rate of 12% per annum. In addition, the debt and interest is convertible into
200,000 shares of common stock at $.28 per share on January 5, 2001. Also 65,789
warrants are attached to this debt at an exercise price of $.38 per share, which
warrants are exercisable through January 5, 2005.
On February 5, 2000, the Company secured 12% promissory notes which generated
$345,000 from certain shareholders and board members. Interest accrues at a rate
of 12% per annum. In addition, the debt and interest is convertible into
1,983,334 shares of common stock at $.24 per share on February 5, 2001. Also
566,667 warrants are attached to this debt at an exercise price of $.30 per
share, which warrants are exercisable through February 5, 2005.
The Company believes that its current cash resources, cash flow from operations,
cost savings and its past ability to obtain additional financing will be
sufficient to adequately fund its current working capital needs through the
fiscal year commencing July 1, 1999. In the event that the Company needs
additional working capital to finance its operations or capital expenditures,
the Company believes it could meet its needs through either additional
borrowings or the sale of additional equity, although there can be no assurance
that the Company would be successful in obtaining any such financing or on what
terms such transactions could be effected.
Year 2000 Compliance
The Company has undertaken a comprehensive review of its computer-based systems
and applications to identify modifications necessitated by the century change in
the year 2000 and has implemented a plan to make such modifications. The Company
has completed critical systems compliant with the century change prior to
December 31, 1999. The Company has
23
<PAGE>
completed the process of updating all accounting and computer programs. The
Company's costs of compliance was not material relative to its financial
condition. The Company has made inquiries with its' suppliers in regards to year
2000 compliance issues and no issues were derived from the year 2000 compliance.
Item 7. Financial Statements.
The financial statements are filed as part of this Annual Report on
Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants.
On April, 21 1999, KPMG LLP (the "Former Accountant") notified Arthur
Treacher's Inc. (the Company") that the client -auditor relationship
had ceased. The Former Accountant had served as the Company's
independent public accountant prior to its resignation. The Former
Accountant's report on the financial statements for the past two years
did not contain an adverse opinion or a disclaimer of opinion. There
were no disagreements with the Former Accountant on any matter of
accounting principles or practices, financial statement disclosures or
auditing scope or procedure.
The Company than engaged Lytkowski & Company LLP to replace the Former
Accountant as the Company's independent certifying public accountant.
On February, 20 2000, Lytkowski & Company LLP (the "Former Accountant")
was notified by Arthur Treacher's Inc. (the Company") that the client
-auditor relationship had ceased. The Former Accountant had served as
the Company's independent public accountant prior to its resignation.
The Former Accountant's report on the financial statements for the past
ten months did not contain an adverse opinion or a disclaimer of
opinion. There were no disagreements with the Former Accountant on any
matter of accounting principles or practices, financial statement
disclosures or auditing scope or procedure.
The Company than engaged Davis Monk & Company to replace the Former
Accountant as the Company's independent certifying public accountant.
24
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Bruce R. Galloway 42 Chairman of the Board and
Chief Executive Officer
Skuli Thorvaldsson 58 Vice Chairman of the Board
William F. Saculla 48 President, Chief Financial Officer,
Secretary, Director
Donald Perlyn 56 Director
Maurice Sonnenburg 63 Director
Evan Binn 60 Director
Sigurdur Jon Bjornsson 34 Director
</TABLE>
Directors
Bruce R. Galloway. Mr. Galloway has been Chief Executive Officer since May 1998
and Chairman of the Board of Directors since May 1996. Mr. Galloway is currently
a managing director of Burnham Securities Inc., the placement agent in the
November Private Placement, an NASD Broker/Dealer and investment bank based in
New York. Prior to joining Burnham in 1993, Mr. Galloway was a senior vice
president at Oppenheimer & Company, an investment bank and NASD Broker/Dealer
based in New York, from 1991 through 1993. Mr. Galloway holds a B.A. degree in
Economics from Hobart College and an M.B.A. in Finance from New York
University's Stern Graduate School of Business.
Skuli Thorvaldsson. Mr. Thorvaldsson has been Vice Chairman of the Board of
Directors since May 1996. Mr. Thorvaldsson has been the Chief Executive Officer
of the Hotel Holt in Iceland since 1980. . Mr. Thorvaldsson has various
diversified interests in food court services, travel agency and pork processing.
He is also a master franchisee of Domino's Pizza in Scandinavia. Mr.
Thorvaldsson is a director of Allied Resources Corp. Mr. Thorvaldsson graduated
from the Commercial College of Iceland and the University of Barcelona. Mr.
Thorvaldsson received his Degree in Law from the University of Iceland.
25
<PAGE>
William F. Saculla. Mr. Saculla has served as Secretary of the Company and Chief
Financial Officer since 1984. In May 1998, Mr. Saculla was named President and
was also nominated to the Board of Directors. Mr. Saculla earned a B.S. degree
in Accounting from Youngstown State University in 1978.
Donald Perlyn. In November 1998, Mr. Perlyn was nominated to the Board of
Directors. Mr. Perlyn Joined Miami Subs Corporation in May of 1989. In addition
to being an attorney, he is a 32 year veteran of the of the restaurant industry
with extensive experience in restaurant development, operations and franchising.
Since 1989, Mr. Perlyn has been responsible for the development and growth of
the Miami Subs Grill concept. Mr. Perlyn was promoted to the position of
President of Miami Subs Corporation in July of 1998. In October of 1999, Miami
Subs Corp. was acquired by Nathan's Famous Inc. As a result of this acquisition,
Mr. Perlyn, in addition to his responsibilities at Miami Subs, assumed the
position of Executive Vice President of Nathan's Famous, Inc. He is also a
member of the Board of Directors of Nathan's.
Maurice Sonnenberg In November 1998, Mr. Sonnenberg was nominated to the Board
of Directors. Mr. Sonnenberg has served as an advisor to five United States
Presidential Administrations on matters of finance, international trade, foreign
policy and intelligence matters. Among his vocational activities he presently
serves as the Senior International Advisor to the investment banking firm of
Bear Stearns & Co. Inc. and as the Senior International Advisor to the law firm
of Manatt, Phelps and Philips, LLP (with offices in Washington DC and Los
Angeles).
Evan Binn. In November 1998, Mr. Binn was nominated to the Board of Directors.
Mr. Binn received his bachelors degree from University of California at Los
Angeles and is A Certified Public Accountant in California. He is a member of
the California Society of Certified Public Accountants and has maintained a
practice in Los Angeles, CA for thirty seven years.
Sigurdur Jon Bjornsson. Mr. Bjornsson has been a member of the Board of
Directors since March 2000. Since 1997, he has been Vice President and Chief
Financial Officer of EFA Venture Inc., a venture capital firm. From 1993 through
1997, he was the sales manager at Icelandic American Trading, a distributor of
products in Iceland. Mr. Bjornsson received his bachelors degree in 1993 from
the University of Iceland.
Each Director is elected to serve until the Company's next annual meeting of
Shareholders and until his successor is duly elected and qualified. There are no
agreements with respect to the election of directors. Executive officers are
appointed annually by the Board of Directors and each executive officer serves
at the discretion of the Board of Directors.
Other Key Employees
Thomas K. Hoffman, Executive Vice President, Corporate Development. Mr. Hoffman
joined the Company when MIE was purchased in November of 1996. In his current
capacity he is responsible for purchasing, new product development, store
development and franchise relations. Prior to this he served as Vice President
of Operations for MIE from 1986 until 1996. He continued supervising the MIE
stores after the Company purchased the franchise until May 1998 when he was
promoted to his current position. He received a BA degree in Business Management
from Bloomsburg University in 1975.
26
<PAGE>
Robert J. Zelinski, Controller, Assistant Secretary. Mr. Zelinski has served as
Controller of the Company since 1987. Mr. Zelinski is responsible for the
Company's financial reporting activities and internal controls . Mr. Zelinski
earned a B.S. degree in Accounting from Youngstown State University's Williamson
School of Business in 1987 and was also a franchisee of the Company from 1990
through 1993.
Committees
The Company has the following committees:
Executive, Compensation and Audit. The Board of Directors elected William F.
Saculla, Bruce Galloway and Skuli Thorvaldsson to the Executive Committee. The
Compensation Committee of the Board of Directors was formed to review the
Company's executive compensation proposals, subject to the approval of the Board
of Directors. The Compensation Committee is composed of Skuli Thorvaldsson and
Bruce Galloway. The Audit Committee was formed to advise the Board in matters
relating to the audit of the Company's financial statements and the Company's
financial reporting systems. Messrs. Bruce Galloway, R. Skuli Thorvaldsson,
William Saculla, and George Koo, an independent advisor to the Company, serve as
members of the Audit Committee.
In addition, the International Advisory Committee was formed to advise the Board
of Directors regarding international operations and expansion opportunities,
although without the power to obligate the Company. The Board selected Messers.
Gudmundur Jonsson, David Baron, Valdimar Thomasson, Evan Binn, Gisly Martinsson,
Lorie Karnath and Hans Rutkowski to the International Advisory Committee.
Item 10. Executive Compensation.
The following table provides certain summary information concerning the
compensation paid or accrued by the Company to or on behalf of its Chief
Executive Officer and the other named executive officers of the Company for
services rendered in all capacities to the Company and its subsidiaries for the
fiscal years ended June 30, 1999, 1998 and 1997.
(a) Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
------------------------
Annual Compensation Awards Payouts Payouts
---------------------- -------------- -------
Securities
Name and Principal Other Annual Restricted Underlying LTIP All Other
Position Year Salary Bonus Compensation Stock Award(s) Options/SARs Payouts Compensation
- -------- ---- ------ ----- ------------ -------------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bruce Galloway 1999 $ 110,000.00 0.00 $0.00 0.00 10,000. $0.00 0
Chairman, CEO
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $ 20,000.00 0.00 $0.00 0.00 255,000 $0.00 0
shares of Common
Stock
1997 $ 00,000.00 0.00 $0.00 0.00 430,000 $0.00
shares of Common
Stock
William F. Saculla 1999 $ 95,000.00 0.00 $0.00 0.00 10.000 $0.00 0
President,
Treasurer
1998 $ 78,000.00 0.00 $0.00 0.00 0.00 $0.00 0
shares Common
Stock
1997 $ 75,000.00 0.00 $0.00 0.00 0.00 $0.00
shares Common
Stock
</TABLE>
Mr. Galloway has agreed to forego salary of $190,000 for an aggregate of
$880,812 warrants, with exorcise prices ranging from $.08 to $2.16 per share.
(b) Option/SAR Grants in Last Fiscal Year - None
(c) Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values
<TABLE>
<CAPTION>
Shares acquired on Number of Unexercised Value of unexercised
Name exercise Value Realized options/SARs at June 30, 1999 in-the-money options/SARs at
June 30, 1999
<S> <C> <C> <C> <C>
Bruce Galloway 0 0 695,000 options $0.00 Exercisable
685,000 Exercisable
10,000 Unexerciseable
</TABLE>
(1) 25% of the options for 20,000 vest each year over a period of four years
commencing March 27, 1997 and are exercisable for five years after vesting.
20% of the options for 260,000 shares vest each year over a period of five
years commencing June 1, 1997 and are exercisable for five years after vesting.
28
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of February 28, 2000, with respect
to officers, directors and persons who are known by the Company to be beneficial
owners of more than 5% of the Company's Common Stock. Except as otherwise
indicated, the Company believes that the beneficial owners of the Common Stock
listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.
Shareholder Shares Percentage
- --------------------------------------------------------------------------------
Bruce R. Galloway (1) 2,591,694 15.3
Fred Knoll (2) 1,305,487 8.2
Magee Industrial
Enterprises, Inc.(3) 1,009,718 6.2
Skuli Thorvaldsson (4) 959,086 5.9
Evan Binn and Ronna Binn(5) 811,458 5.1
NTS Financial Services Ltd. (6) 789,458 5.0
Donald Perlyn (7) 71,667 .5
William Saculla(8) 71,242 .5
Maurice Sonnenberg (9) 40,000 .3
Officers and Directors as a Group(10) 5,850,634 26.0%
Total Outstanding Shares 15,424,004
Notes
(1) Mr. Bruce R. Galloway is the Chairman of the Board of the Company.
Includes warrants to purchase 380,000 shares of Common Stock at a
purchase price of $1.00, which warrants are exercisable through May 31,
2001; (ii) warrants to purchase 250,000 shares of Common Stock which
are exercisable at an exercise price of $1.00 per share through
December 31, 2001; (iii) warrants to purchase 10,000 shares of Common
Stock which are exercisable at an exercise price of $1.00 per share
through March 27, 2002; (iv) warrants to purchase 10,000 shares of
Common Stock at an exercise price of $1.00 per share through November
24, 2003; (v) a promissory note convertible to 89,080 shares of Common
Stock at a conversion price of $.44 per share commencing May 10, 2000;
(vi) warrants to purchase 72,000 shares of Common Stock at an exercise
price of $.44 per share through May 10, 2004; (vii) warrants to
purchase 175,000 shares of Common Stock at an exercise price of $.30
per share through September 30, 2004; (viii) warrants to purchase
83,333 shares of Common
29
<PAGE>
Stock at an exercise price of $.30 per share through October 21, 2004;
(ix) warrants to purchase 65,789 shares of Common Stock at an exercise
price of $.38 per share through December 1, 2004; (x) warrants to
purchase 83,333 shares of Common Stock at an exercise price of $.60 per
share through February 5, 2005; (xi) warrants to purchase 66,211 shares
of Common Stock at an exercise price of $.45 per share through July 10,
2004; (xii) warrants to purchase 23,702 shares of Common Stock at an
exercise price of $.42 per share through August 10, 2004; (xiii)
warrants to purchase 27,824 shares of Common Stock at an exercise price
of $.36 per share through September 10, 2004. (xiv) warrants to
purchase 40,000 shares of Common Stock at an exercise price of $.25 per
share through October 10, 2004; (xv) warrants to purchase 26,667 shares
of Common Stock at an exercise price of $.375 per share through
November 10, 2004; (xvi) warrants to purchase 26,667 shares of Common
Stock at an exercise price of $.375 per share through December 10,
2004; (xvii) warrants to purchase 29,087 shares of Common Stock at an
exercise price of $.34 per share through January 10, 2005; (xviii)
warrants to purchase 26,667 shares of Common Stock at an exercise price
of $.38 per share through February 10, 2005; (xix) warrants to purchase
20,000 shares of Common Stock at an exercise price of $.38 per share
through March 15, 2004. Excludes (i) a promissory note convertible to
560,000 shares of Common Stock at a conversion price of $.21 per share
on September 30, 2000; (ii) a promissory note convertible into 266,666
shares of Common Stock at a conversion price of $.21 per share on
October 21, 2000; (iii) a promissory note convertible to 200,000 shares
of Common Stock at a conversion price of $.28 per share on December 1,
2000; (iv) a promissory note convertible to 233,333 shares of Common
Stock at a conversion price of $.24 per share on February 5, 2001.
(2) Includes warrants to purchase 10,000 shares of Common Stock at an
exercise price of $1.00, which warrants are exercisable through March
27, 2002; (ii) warrants to purchase 10,000 shares of Common Stock at an
exercise price of $1.00 through April 30, 2003; (iii) warrants to
purchase 10,000 shares of Common Stock at an exercise price of $1.00
through November 24, 2003. The following notes and warrants are owned
by Europa International Inc. Knoll Capital Management, Inc., is the
investment manager for Europa. Mr. Knoll is the sole shareholder of
Knoll Capital Management Inc. (I) Includes a promissory note
convertible to 132,572 shares of Common Stock at a conversion price of
$.44 per share on May 10, 2000; (ii) warrants to purchase 50,000 shares
of Common Stock at an exercise price of $.44 per share through May 10,
2004; (iii) warrants to purchase 83,333, shares of Common Stock at an
exercise price of $.30 per share through September 30, 2004; (iv)
warrants to purchase 83,333 shares of Common Stock at an exercise price
of $.30 per share through October 21, 2004; (v) warrants to purchase
83,333 shares of Common Stock at an exercise price of $.30 per share
through February 5, 2005; (vi) warrants to purchase 20,000 shares of
Common Stock at an exercise price of $.38 per share through March 15,
2004. Excludes a promissory note convertible to 266,666 shares of
Common Stock at a conversion price of $.21 per share on September 30,
2000; (ii) a promissory note convertible to 266,666 shares of Common
Stock at a conversion price of $.21 per share
30
<PAGE>
on October 21, 2000; (iii) a promissory note convertible to 233,333
shares of Common Stock at a conversion price of $.24 per share on
February 5, 2001. Includes 156,250 shares of Common Stock owned by
Europa International Inc.
(3) Gives effect to the conversion of 490,000 shares of Series B Preferred
Stock into 765,625 shares of Common Stock for no additional
consideration. Excludes 236,269 shares of Common Stock that Magee will
receive on June 5, 2000 in lieu of note payment.
(4) Includes warrants to purchase 250,000 shares of Common Stock at a
purchase price of $1.00, which warrants are exercisable through May 31,
2001; (ii) warrants to purchase 50,000 shares of Common Stock which are
exercisable through January 9, 2002 at an exercise price of $1.00 per
share (iii) warrants to purchase 10,000 shares of Common Stock which
are exercisable at an exercise price of $1.00 per share through March
27, 2002, and (iv) warrants to purchase 10,000 shares of Common Stock
at an exercise price of $1.00 through November 24, 2003; (v) a
promissory note convertible to 159,086 shares of Common Stock at a
conversion price of $.44 per share on May 10, 2000; (vi) warrants to
purchase 60,000 shares of Common Stock at an exercise price of $.44 per
share through May 10, 2004; (vii) warrants to purchase 20,000 shares of
Common Stock at an exercise price of $.38 per share through March 15,
2004.
(5) Includes warrants to purchase 50,000 shares of Common Stock owned by
Mr. And Mrs. Binn and are exercisable at a price of $1.00 per share
through May 31, 2001, (ii) warrants to purchase 10,000 shares of Common
Stock at an exercise price of $1.00 through November 24, 2003 ; (iii)
warrants to purchase 83,333, shares of Common Stock at an exercise
price of $.30 per share through September 30, 2004; (iv) warrants to
purchase 83,333 shares of Common Stock at an exercise price of $.30 per
share through February 5, 2005; warrants to purchase 20,000 shares of
Common Stock at an exercise price of $.38 per share through March 15,
2004. Excludes a promissory note convertible to 266,666 shares of
Common Stock at a conversion price of $.21 per share on September 30,
2000; (ii) a promissory note convertible to 233,333 shares of Common
Stock at a conversion price of $.24 per share on February 5, 2001.
(6) Includes warrants to purchase 140,000, shares of Common Stock at an
exercise price of $.60 per share through September 30, 2004; (ii)
warrants to purchase 83,333 shares of Common Stock at an exercise price
of $.30 per share through October 21, 2004; (iii) warrants to purchase
65,789 shares of Common Stock at an exercise price of $.38 per share
through January 10, 2005; (iv) warrants to purchase 83,333 shares of
Common Stock at an exercise price of $.30 per share through February 5,
2005. Excludes a promissory note convertible to 448,000 shares of
Common Stock at a conversion price of $.21 per share on September 30,
2000; (ii) a promissory note convertible to 266,666 shares of Common
Stock at a conversion price of $.21 per share on October 21, 2000;
(iii) a promissory note convertible to 200,000 shares of Common Stock
at a conversion price of $.28 per share on January 5, 2001; (iv) a
promissory note convertible to 233,333
31
<PAGE>
shares of Common Stock at a conversion price of $.24 per share on
February 5, 2001;
(7) Includes warrants to purchase 10,000 shares of Common Stock at an
exercise price of $1.00 through November 24, 2003, and warrants to
purchase 41,667 shares of Common Stock at an exercise price of $.30 per
share through February 5, 2005, and warrants to purchase 20,000 shares
of Common Stock at an exercise price of $.38 per share through March
15, 2004. Excludes a promissory note convertible to 116,667 shares of
Common Stock at a conversion price of $.24 per share on February 5,
2001,
(8) Mr. William Saculla is the President, Treasurer, and Secretary of the
Company. Includes options to purchase 9,000 shares of Common Stock at a
price of $1.00 per share through August 31, 2002. Does not include
options which have been granted but have not vested to purchase 6,000
shares of Common Stock at a price of $1.00 per share. 20% of such
options vest for a period of five years commencing September 1, 1999.
Includes warrants to purchase 10,000 shares of Common Stock at an
exercise price of $1.00 through November 24, 2003, and warrants to
purchase 16,667 shares of Common Stock at an exercise price of $.30 per
share through February 5, 2005, and warrants to purchase 20,000 shares
of Common Stock at an exercise price of $.38 per share through March
15, 2004. Excludes a promissory note convertible to 46,667 shares of
Common Stock at a conversion price of $.24 per share on February 5,
2001.
(9) Includes warrants to purchase 10,000 shares of Common Stock at an
exercise price of $1.00 through November 24, 2003, and warrants to
purchase 30,000 shares of Common Stock at an exercise price of $.38 per
share through March 15, 2004.
Item 12. Certain Relationships and Related Transactions.
On September 15, 1998, Skuli Thorvaldsson, a Director of the Company,
participated in a private placement of the Company's secured 15% promissory
notes and common stock purchase warrants, which private placement generated
gross proceeds of $600,000. Mr. Thorvaldsson loaned the Company $400,000
pursuant to the terms of a promissory note. Interest accrues at the rate of 15%
per annum. In addition, Mr. Thorvaldsson received warrants to purchase 100,000
shares of Common Stock at an exercise price of $1.78 per share, which warrants
are exercisable through September 15, 2003.
On September 28, 1999, the debt was converted to 4,000 shares of Series D
Preferred Stock. The Preferred Stock is convertible by the holder to shares of
Common Stock at a conversion price of $1.00 per share of Common Stock the 4,000
shares of Preferred Stock issuable upon conversion of the Note in the principal
amount of $400,000 is convertible into 400,000 shares of Common Stock.
On May 10, 1999, the Company issued 16% promissory notes in the aggregate
principal amount of $182,000, included notes in the principal amount of $72,000,
$60,000 and $50,000 from Mr. Bruce Galloway, Mr. Skuli Thorvaldsson, and Europa
International Inc. Knoll Capital Management, Inc., is the investment manager for
Europa. Mr. Knoll is the sole shareholder of
32
<PAGE>
Knoll Capital Management Inc. respectfully. Interest accrues at a rate of 16%
per annum. In addition, the debt and interest is convertible into 380,737 shares
of common stock at $.44 per share on May 10, 2000. In conjunction with the
promissory notes The Company issued 182,000 warrants at an exercise price of
$.44 per share, which warrants are exercisable through May 10, 2004.
On September 30, 1999, the Company issued 12% promissory notes in the aggregate
principal amount of $239,000 included notes in the principal amount of $105,000,
$84,000, $50,000 and $50,000 from Mr. Bruce Galloway, NTS Financial Services
Ltd., Mr. Evan Binn and Europa International Inc. Knoll Capital Management,
Inc., is the investment manager for Europa. Mr. Knoll is the sole shareholder of
Knoll Capital Management Inc. respectfully. Interest accrues at a rate of 12%
per annum. In addition, the debt and interest is convertible into 1,541,333
shares of common stock at $.21 per share on September 30, 2000. In conjunction
with the promissory notes The Company issued 481,667 warrants at an exercise
price of $.30 per share, which warrants are exercisable through September 30,
2004.
On October 21, 1999, the Company issued 12% promissory notes in the aggregate
principal amount of $221,000 included notes in the principal amount of $50,000,
$50,000 and $50,000 from Mr. Bruce Galloway, NTS Financial Services Ltd., and
Europa International Inc. Knoll Capital Management, Inc., is the investment
manager for Europa. Mr. Knoll is the sole shareholder of Knoll Capital
Management Inc. respectfully. Interest accrues at a rate of 12% per annum. In
addition, the debt and interest is convertible into 1,420,714 shares of common
stock at $.21 per share on October 21, 2000. In conjunction with the promissory
notes The Company issued 368,333 warrants at an exercise price of $.30 per
share, which warrants are exercisable through October 21, 2004.
On December 1, 1999, the Company issued 12% promissory notes in the aggregate
principal amount of $50,000 from Mr. Bruce Galloway the Company's CEO and
Chairman of the Board. Interest accrues at a rate of 12% per annum. In addition,
the debt and interest is convertible into 200,000 shares of common stock at $.28
per share on December 1, 2000. In conjunction with the promissory notes The
Company issued 65,789 warrants at an exercise price of $.38 per share, which
warrants are exercisable through December 1, 2004.
On January 5, 2000, the Company issued 12% promissory notes in the aggregate
principal amount of $50,000 from NTS Financial Services Ltd., a Director of the
Company. Interest accrues at a rate of 12% per annum. In addition, the debt and
interest is convertible into 200,000 shares of common stock at $.28 per share on
January 5, 2001. In conjunction with the promissory notes The Company issued
65,789 warrants at an exercise price of $.38 per share, which warrants are
exercisable through January 5, 2005.
On February 5, 2000, the Company issued 12% promissory notes in the aggregate
principal amount of $345,000 included notes in the principal amount of $50,000,
$50,000, $50,000 and
33
<PAGE>
$50,000 from Mr. Bruce Galloway, NTS Financial Services Ltd., Mr. Evan Binn
and Europa International Inc. Knoll Capital Management, Inc., is the investment
manager for Europa. Mr. Knoll is the sole shareholder of Knoll Capital
Management Inc. respectfully. Interest accrues at a rate of 12% per annum. In
addition, the debt and interest is convertible into 1,983,334 shares of common
stock at $.24 per share on February 5, 2001. In conjunction with the promissory
notes The Company issued 566,667 warrants at an exercise price of $.30 per
share, which warrants are exercisable through February 5, 2005.
Item 13. Exhibits and Report
(a) Exhibits
3.1.1 *Registrant's Certificate of Incorporation
3.1.2 *Agreement and Plan of Reorganization and First
Addendum dated December 5, 1983
3.1.3 *Certificate of Merger dated January 23, 1984
3.1.4 *Articles of Merger dated January 27, 1984
3.1.5 *Articles of Amendment to Articles of Incorporation
dated January 27, 1984
3.1.6 *Amendment to Articles of Incorporation dated January
27, 1986
3.1.7 *Articles of Amendment to Articles of Incorporation
dated June 28, 1996
3.2 *Registrant's Bylaws
4.1 *Form of Common Stock Certificate
4.2 *Certificate of Designation of Series A Preferred
Stock
4.3 *Certificate of Designation of Series B Preferred
Stock
4.4 *Certificate of Designation of Series C Preferred
Stock
4.5 *Certificate of Designation of Series D Preferred
Stock
10.1 *Purchase Agreement dated May 31, 1996 between James
Cataland and Registrant
34
<PAGE>
Exhibits
--------
*Exhibit A - Option Agreement
(See Exhibit 10.16)
*Exhibit B - Consulting Agreement
(See Exhibit 10.14
Schedules
---------
**Schedule A - States of Incorporation and
Qualification
**Schedule B - Financial Statements
**Schedule C - Taxes
**Schedule D - Contracts
**Schedule E - Accounts Receivable
**Schedule F - Litigation
**Schedule G - Conflicting Interests
**Schedule H - Leases
**Schedule I - Franchises
**Schedule J - Trademarks
**Schedule K - Payroll Register
**Schedule L - Employment Contracts
**Schedule M - Insurance Policies
10.3 *Purchase Agreement dated November 27, 1996, between
M.I.E. Hospitality and Registrant
<TABLE>
<CAPTION>
Schedules
---------
<S> <C>
**Schedule 1 Notice of Target Inter-Company Debt
**Schedule 1(b) Seller's Distribution Schedule (See Exhibit 10.17)
**Schedule B Qualifications as Foreign Corporations in
Delaware, New Jersey, New York
**Schedule 2(a) Capital Stock Representations, Exceptions, etc.
**Schedule 2(b) Exceptions to GAAP and Ordinary Course of Business
since September
</TABLE>
35
<PAGE>
<TABLE>
<S> <C>
30, 1996, etc.
**Schedule 2(c) Disclosure of Liabilities of M.I.E. Hospitality Not
Disclosed in Financial Statements or Other
Schedules
**Schedule 2(d) Exceptions to Tax Returns, Representations and Warranties
**Schedule 2(e) List of assets owned or leased, etc.
**Schedule 2(f) Exceptions to Usability and Salability of Inventories
**Schedule 2(g) Contracts, Notices, Defaults, etc.
**Schedule 2(g)(5) Insurance policies and bonds
**Schedule 2(g)(6) Banks
**Schedule 2(g)(7) Interests in entities having been party to transaction
with M.I.E. in past 12 months
**Schedule 2(g)(8) Consents or approvals of third parties required
**Schedule 2(g)(9) Accounts receivable aging schedule
**Schedule 2(i) Salary increases, contracts with employees, agents, etc.,
and M.I.E. benefit plans; M.I.E. payroll roster;
Collective Bargaining Agreements
**Schedule 2(k) Legal Actions
**Schedule 2(l) Patents and trademarks, licenses, etc.
**Schedule 2(m) List of Indemnification Given for M.I.E. Hospitality for
Patent,
</TABLE>
36
<PAGE>
<TABLE>
<S> <C>
Trademark or Copyright Infringement
**Schedule 2(o) Insurance Policies, see Schedule 2(g)(5)
**Schedule 2(p) Outstanding Loans or Advances or Obligations to Make Loans
or Advances
**Schedule 2(r) Environmental
**Schedule 3(b) Consents required for performance by Buyer
**Schedule 3(d) Preferred Stock Rights and Preferences
**Schedule 3(e) Buyer Financials
**Schedule 5 Consents and Release of Guarantees Received by M.I.E.
Hospitality (Identified Leases)
**Schedule 5(i) Consents to Lease, etc., not received
**Schedule 7(e) Actual Knowledge (individuals)
**Schedule 12(i) Target Working Capital Statement
Exhibits
--------
*Exhibit A M.I.E. Note (See Exhibit 10.8)
*Exhibit B Buyer Guaranty (See Exhibit 10.4)
*Exhibit C Buyer Note (See Exhibit 10.7)
**Exhibit 2(b) Balance Sheets and statements of Income as of 12/31/95 and
9/30/96
</TABLE>
37
<PAGE>
<TABLE>
<S> <C>
**Exhibit D Form of Questionnaire
**Exhibit D-1 Responses to Questionnaire
*Exhibit E Escrow Agreement (See Exhibit 10.5)
*Exhibit F General Mutual Releases (See Exhibit 10.6)
</TABLE>
10.4 *Guaranty Surety Agreement dated November 27, 1996 by
Arthur Treacher's, Inc.
10.5 *Escrow Agreement dated November 27, 1996 among
Arthur Treacher's, Inc. Seller and Brown Brothers
Harriman & Co.
10.6 *Mutual Release Agreement dated November 27, 1996,
among M.I.E. Hospitality, Inc. and Magee Industrial
Enterprises, Inc.
10.7 *Promissory Note dated November 27, 1996 for $390,417
from M.I.E. Hospitality, Inc. in favor of Magee
Industrial Enterprises Inc.
10.8 *Promissory Note dated November 27, 1996 for
$1,139,563 from M.I.E. Hospitality, Inc in favor of
Magee Industrial Enterprises, Inc.
10.9 *Uniform Franchise Offering Circular as of January 1,
1997
10.10 *Form of Franchise Agreement as of January 1, 1997
10.11 *Form of Warrant exercisable at $1.51 per share
10.12 *Form of Warrant to Burnham Securities, Inc.
10.13 *Form of Stock Option to Employees
10.16 *Option Agreement dated March 29, 1996 between James
Cataland and Skuli Thorvaldsson
10.17 *Schedule 1(b) to the Purchase Agreement dated
November 27, 1996 between M.I.E. Hospitality and
Registrant.
10.18 *Form of agreement with holders of Series A
Preferred Stock
38
<PAGE>
10.19 Forbearance Agreement between the Company and Magee
Industrial Enterprises, Inc. dated October 21, 1999
10.20 Co-Branding Agreement between the Company and Miami
Subs dated August 13, 1998
11.1 *Statement of Computation of Per Share Earnings
21. *List of Subsidiaries
27. Financial Data Schedules
* Previously Filed with Form 10-SB Declared Effective on August 12, 1997
** Not Included with previous filings.
*** Previously Filed with Form 10-QSB filed on November 13, 1997
39
<PAGE>
SIGNATURES
In accordance with the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ARTHUR TREACHER'S, INC.
(Registrant)
Date: April 17, 2000 By /s/ Bruce Galloway
-----------------------------------------
Bruce Galloway
Chief Executive Officer
By /s/ William F. Saculla
-----------------------------------------
William F. Saculla
President, Chief Financial Officer
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Bruce Galloway Chief Executive Officer, Director, April 17 , 2000
- ----------------------------- Chairman of the Board
Bruce Galloway
/s/ William F. Saculla President, Treasurer, Chief April 17 , 2000
- ---------------------------- Financial Officer, Director
William F. Saculla
Director April , 2000
- ----------------------------
Skuli Thorvaldsson
Director April , 2000
- ----------------------------
Donald Perlyn
/s/ Evan Binn Director April 17 , 2000
- ----------------------------
Evan Binn
/s/ Maurice Sonnenburg Director April 17 , 2000
- ----------------------------
Maurice Sonnenburg
Director April , 2000
- ----------------------------
Sigurdur Jon Bjornsson
</TABLE>
40
<PAGE>
ARTHUR TREACHER'S, INC.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
CONTENTS
PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5-F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8-F-17
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Arthur Treacher's, Inc.
We have audited the consolidated balance sheet of Arthur Treacher's, Inc. as of
June 30, 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of Arthur
Treacher's Inc. as of June 30, 1998, were audited by other auditors whose report
dated September 4, 1998, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the June 30, 1999 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Arthur Treacher's, Inc. as of June 30, 1999, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10 to the
consolidated financial statements, the Company has a negative working capital, a
stockholders' deficit of approximately $3,000,000 and continued net losses.
These conditions raise substantial doubt about its ability to continue as a
going concern. Management's plans regarding those matters also are described in
Note 10. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
DAVIS, MONK & COMPANY
February 1, 2000
Gainesville, Florida
F-2
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
ASSETS
1999 1998
---- ----
CURRENT ASSETS
Cash and Cash Equivalents $165,459 $909,636
Accounts Receivable, Net of Allowance of $49,700
in 1999 and $19,900 in 1998 149,468 90,618
Inventories 174,930 274,738
Prepaid Expenses and Other 94,176 173,509
-------- --------
TOTAL CURRENT ASSETS 584,033 1,448,501
PROPERTY AND EQUIPMENT
Buildings -- 156,300
Leasehold Improvements 4,072,762 4,640,605
Furniture, Fixtures, and Equipment 2,943,477 3,450,160
---------- ----------
7,016,239 8,247,065
Less - Accumulated Depreciation 5,450,502 3,173,746
---------- ----------
PROPERTY AND EQUIPMENT, NET 1,565,737 5,073,319
OTHER ASSETS
Deposits 134,213 198,574
Goodwill, Net of Accumulated Amortization of $42,178
in 1999 and $25,851 in 1998 284,362 450,689
Other 73,174 141,511
--------- ---------
TOTAL OTHER ASSETS 491,749 790,774
--------- ---------
TOTAL ASSETS $2,641,519 $7,312,594
=========== ==========
F-3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
---- ----
CURRENT LIABILITIES
Accounts Payable $2,968,623 $2,307,009
Accrued Expenses and Other Liabilities 410,025 501,545
Current Maturities of Long-Term Debt 570,579 393,312
Dividend Payable -- 390,417
Deferred Revenue 367,850 --
---------- ----------
TOTAL CURRENT LIABILITIES 4,317,077 3,592,283
LONG-TERM DEBT, Net of Current Maturities 1,119,300 1,398,805
OTHER LIABILITIES
Deferred Revenue 248,000 --
Other -- 15,358
---------- ----------
TOTAL OTHER LIABILITIES 248,000 15,358
---------- ----------
TOTAL LIABILITIES 5,684,377 5,006,446
STOCKHOLDERS' EQUITY
Preferred Stock 2,000,000 Shares Authorized:
Series A Convertible, Par Value $1; 2,200
Shares Issued and Outstanding at June 30,
1999; 12,800 Shares Issued and Outstanding
at June 30, 1998; Involuntary Liquidation
Preference of $1 Per Share Plus Accrued and
Unpaid Dividends 2,200 12,800
Series B Convertible, Par Value $1; 490,000
Shares Issued and Outstanding; Involuntary
Liquidation Preference of $1 Per Share 490,000 490,000
Series C, Par Value $100; 9,900 Shares Issued
and Outstanding; Involuntary Liquidation
Preference of $100 Per Share Plus Accrued and
Unpaid Dividends 852,705 852,705
Series D, Par Value $100; 4,000 Shares Issued
and Outstanding; Involuntary Liquidation
Preference of $100 Per Share Plus Accrued and
Unpaid Dividends 399,980 --
Common Stock $.01 Par Value; Authorized
25,000,000 Shares Issued and Outstanding;
15,149,181 Shares at June 30, 1999; 14,869,748
Shares at June 30, 1998 151,651 148,539
Additional Paid-In Capital 10,516,950 10,411,729
Accumulated Deficit (15,456,344) (9,609,625)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY (3,042,858) 2,306,148
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,641,519 $7,312,594
============ ===========
See accompanying Notes.
F-4
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998
1999 1998
---- ----
REVENUES
Restaurant Sales $20,567,361 $22,329,369
Franchise Fees and Royalties 355,776 330,569
Other Revenues 608,692 326,824
----------- -----------
TOTAL REVENUES 21,531,829 22,986,762
OPERATING EXPENSES
Cost of Sales, Including Occupancy
Except Depreciation 12,855,353 12,144,241
Operating Expenses 8,569,080 9,747,656
Depreciation and Amortization 1,204,321 1,215,356
General and Administrative Expenses 1,905,439 1,990,625
Impairment of Assets 2,036,955 --
----------- -----------
TOTAL OPERATING EXPENSES 26,571,148 25,097,878
----------- -----------
LOSS FROM OPERATIONS (5,039,319) (2,111,116)
OTHER INCOME (EXPENSES)
Interest Expense, Net of Interest Income of
$6,842 in 1999 and $38,154 in 1998 (168,885) (154,533)
Other, Net (638,515) (503,046)
----------- -----------
TOTAL OTHER INCOME (EXPENSES) (807,400) (657,579)
----------- -----------
NET LOSS (5,846,719) (2,768,695)
UNDECLARED PREFERRED STOCK DIVIDENDS (102,390) (60,107)
----------- ------------
NET LOSS FOR COMMON SHAREHOLDERS $(5,949,109) $ (2,828,802)
=========== ============
Basic Loss Per Common Share (.40) (.19)
=========== ===========
Diluted Loss Per Common Share (.40) (.19)
=========== ===========
Weighted Average Number of Outstanding Shares for
Basic and Diluted 14,966,624 14,537,153
=========== ===========
See accompanying Notes.
F-5
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
Additional
Preferred Common Paid in Accumulated
Stock Stock Capital Deficit Total
Balance at
June 30, 1997 $577,200 $143,992 $9,704,248 $(6,840,930) $3,584,510
Common Stock Issued -- 2,690 571,553 -- 574,243
Stock Issued for
Restaurant Purchases -- 341 99,659 -- 100,000
Preferred Stock
Issued 990,000 -- -- -- 990,000
Preferred Stock
Issuance Costs -- -- (234,310) -- (234,310)
Warrants Issued
Attached to
Preferred Stock (137,295) -- 137,295 -- --
Preferred Stock
Converted to
Common (74,400) 1,116 73,284 -- --
Stock Issued for
Exercised Warrants -- 400 60,000 -- 60,400
Net Loss -- -- -- (2,768,695) (2,768,695)
-------- -------- ----------- ------------ -----------
Balance at June
30, 1998 1,355,505 148,539 10,411,729 (9,609,625) 2,306,148
Preferred Stock
Issued 399,980 -- (44,681) -- 355,299
Common Stock Issued -- 2,515 107,486 -- 110,001
Stock Issued to Settle
Accounts Payable -- 438 43,398 -- 43,836
Stock Issuance Costs -- -- (11,423) -- (11,423)
Preferred Stock
Converted to
Common (10,600) 159 10,441 -- --
Net Loss -- -- -- (5,846,719) (5,846,719)
--------- -------- ----------- ------------ -----------
Balance at June
30, 1999 $1,744,885 $151,651 $10,516,950 $(15,456,344) $(3,042,858)
========== ======== =========== ============ ===========
See accompanying Notes.
F-6
<PAGE>
ARTHUR TREACHER'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998
1999 1998
OPERATING ACTIVITIES
Net Loss $(5,846,719) $(2,768,695)
Adjustments to Reconcile Net Loss to
Net Cash Used in Operating Activities:
Depreciation and Impairment 3,241,276 1,215,356
Loss on Disposal of Assets 932,590 36,641
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable (58,851) 46,980
Decrease (Increase) in Deposits and Other
Assets 132,698 (155,401)
Decrease in Prepaid Expenses and Other
Current Assets 79,332 8,035
Decrease in Inventories 99,808 13,925
Increase in Accounts Payable 617,758 1,256,053
Increase (Decrease) in Accrued
Expenses, Other Liabilities
and Dividends Payable 133,913 (139,912)
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES (668,195) (487,018)
------------ -----------
INVESTING ACTIVITIES
Purchase Acquisitions of Restaurants -- (62,500)
Capital Expenditures (427,622) (809,577)
Proceeds from Disposition of Restaurants -- 246,102
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (427,622) (625,975)
FINANCING ACTIVITIES
Proceeds from the Issuance of Common Stock 98,577 634,643
Proceeds from the Issuance of Preferred Stock 355,299 990,000
Preferred Stock Issuance Costs -- (234,310)
Proceeds from Long-Term Debt 435,725 177,216
Principal Payments on Long-Term Debt (537,961) (412,767)
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 351,640 1,154,782
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (744,177) 41,789
CASH AND CASH EQUIVALENTS, Beginning of Year 909,636 867,847
------------ -----------
CASH AND CASH EQUIVALENTS, End of Year $165,459 $909,636
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash Paid for Interest $175,727 $187,906
Noncash Investing and Financing Activities:
Long-Term Debt Assumed in Restaurant
Purchases $ -- $ 87,500
Common Stock Issued to Settle Accounts
Payable $ 43,856 $100,000
See accompanying Notes.
F-7
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the Business
Arthur Treacher's, Inc. (the "Company") owns, operates and franchises quick
service seafood restaurants under the names "Arthur Treacher's Fish & Chips" and
"Arthur Treacher's Seafood Grille". At June 30, 1999, the Company owned and
operated 42 restaurants and franchised an additional 57 restaurants, located in
seven states and Canada, with the greatest concentrations in the northeast and
midwest regions of the United States.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Arthur Treacher's Management Company and Arthur
Treacher's Advertising Company. All material intercompany transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
ninety days or less to be cash equivalents.
Inventories
The Company values its inventories at the lower of cost (first-in, first-out
method) or market.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the respective assets, which range from 3 to 10 years.
Recoverability of Long-Lived Assets
The Company follows the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. During 1999 and 1998,
the Company recognized an impairment loss of approximately $2,037,000 and
$110,000, (which is included in depreciation and amortization in 1998) on the
accompanying consolidated statement of operations, related to the assets at two
store locations in 1998, and approximately 17 stores in two states in 1999.
F-8
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. In addition, the method requires the recognition of future
tax benefits, such as net operating loss and business tax credit carryforwards,
to the extent that realization of such benefits is more likely than not.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Franchise Operations
Franchise royalties, which are based upon a percentage of franchise restaurants'
sales, are recognized as income on the accrual basis. Initial franchise fees are
typically included in revenues when substantially all services and conditions
relating to the sale of the franchise have been performed or satisfied, which
occurs when the franchised restaurant commences operations. Initial franchise
fees for area franchise agreements are recognized as income on a pro rata basis
as the restaurants are opened.
Pre-Opening Costs
Costs associated with opening new restaurants are expensed during the period
incurred.
Per Share Data
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share," during fiscal 1998. This
statement governs the computation, presentation, and disclosure requirements of
earnings per share (EPS) for entities with publicly held common stock.
Net income per share of common stock is computed based upon the weighted average
number of common shares and share equivalents outstanding during the year. When
dilutive, stock options and warrants, and preferred stock are included as share
equivalents. None of these equity instruments are included in the 1999 and 1998
calculations since the Company experienced losses.
Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires the Company's management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-9
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
Stock Options and Warrants
The Company follows the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," in accounting for its options and warrants, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 "Accounting
for Stock Issued to Employees," and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1996 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Goodwill
Goodwill, which has been recorded as a result of purchased acquisitions, is
amortized over the period estimated to benefit from the acquired assets and
rights, which is twenty years.
NOTE 2 - ACQUISITIONS
On June 4, 1998, the Company paid $250,000 in cash, stock, and assumed
liabilities, for one store location. The transaction was accounted for as a
purchase and its results of operations have been included in the consolidated
statement of operations from the date of acquisition forward. As a result of
this acquisition, goodwill of $150,000 has been recorded. This transaction was
not significant to the Company's operations during 1998.
NOTE 3 - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following at June 30,
1999 and 1998:
1999 1998
---- ----
Accrued Professional Fees $ -- $80,000
Accrued Taxes 269,164 267,827
Other 140,861 153,718
-------- --------
Total Accrued Expenses and Other Liabilities $410,025 $501,545
======== ========
F-10
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 4 - LONG-TERM DEBT
Long-term debt consisted of the following at June 30, 1999 and 1998:
1999 1998
Note payable due in semi-annual principal
installments of $113,956, plus interest at 8%,
beginning June 1, 1998, maturing December 2002,
unsecured. At June 30, 1999, the Company was in
default under the agreement and has subsequently
cured the default. $907,228 $1,025,607
Notes payable to banks, due in monthly installments
totaling $8,041, including interest at rates ranging
from 8% to 18%, maturing through June 2005,
collateralized by property and equipment. 172,022 317,994
Various notes payable related to the acquisition of
franchised restaurants, due in monthly installments
of principal and interest at rates ranging from 8% to
14%, maturing at dates through 2007, collateralized
by property and equipment. 218,629 448,516
Various notes payable to related parties,
bearing fixed interest at 16%, payable in full
on May 30, 2000. 392,000 --
---------- ----------
1,689,879 1,792,117
Less Current Maturities 570,579 393,312
---------- ----------
Total Long-Term Debt $1,119,300 $1,398,805
========== ==========
Principal maturities of long-term debt for the next five years and thereafter at
June 30, 1999 are as follows:
Year ending June 30, Amount
2000 $570,579
2001 353,178
2002 337,140
2003 350,116
2004 18,129
Thereafter 60,737
----------
TOTAL $1,689,879
==========
The Company considers the carrying value of its long-term debt to be a
reasonable estimation of its fair value based on the current market rates
available to the Company for debt of the same remaining maturities.
F-11
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 4 - LONG-TERM DEBT (concluded)
Interest paid for the years ended June 30, 1999 and 1998 approximated $175,000
and $192,000 respectively.
NOTE 5 - LEASES
The Company is the lessee under various long-term operating leases for the land
and buildings in which its owned and franchised restaurants operate. The leases
generally range between five and twenty years and usually provide for renewal
options.
The majority of the leases require the Company to be billed for taxes,
insurance, utilities, and maintenance costs of the leased property. Certain of
the leases require additional (contingent) rental payments if sales volumes at
the related restaurants exceed specified limits.
Base rent expense for Company-owned restaurants, net of sublease income of
$12,000 and $12,000 in 1999 and 1998, respectively, was approximately $2,602,000
and $2,396,000 for the years ended June 30, 1999 and 1998, respectively.
The following summarizes future minimum lease payments, for the Company-owned
restaurants, required for leases that have initial or remaining noncancelable
terms in excess of one year as of June 30, 1999:
Year ending June 30, Amount
2000 $2,100,107
2001 2,013,974
2002 1,723,436
2003 1,291,512
2004 774,500
Thereafter 1,821,173
----------
TOTAL $9,724,702
==========
The Company also conditionally guarantees the payment of certain lease
obligations of its franchisees. The amount of this conditional guarantee is
approximately $156,000 in 2000, $132,000 in 2001, $105,000 in 2002 and 2003, and
$15,000 in 2004.
F-12
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 6 - INCOME TAXES
Income tax benefit attributable to income from continuing operations for the
years ended June 30, 1999 and 1998, differed from the amounts computed by
applying the U.S. Federal income tax rate of 34% to income before taxes as
follows:
1999 1998
Computed "expected" tax benefits $(2,043,745) $(941,356)
Increase (decrease) in income taxes resulting from:
Non-deductible meals and entertainment 51,434 17,000
Goodwill amortization 16,327 5,551
Change in valuation allowance 1,850,202 818,341
Other, net 125,782 100,464
----------- ---------
$ -- $ --
=========== =========
The tax effects of temporary differences that give rise to significant portions
of deffered tax assets and liabilities as of June 30, 1998 and 1999 are as
follows:
1999 1998
Deferred Tax Assets:
Net Operating Loss Carryforward $3,649,684 $2,809,098
Allowance for Doubtful Accounts 16,898 6,764
Deferred Royalty 209,389 5,222
Property and Equipment 185,466 --
---------- ----------
Total Gross Deferred Tax Assets 4,061,437 2,821,084
Less Valuation Allowance 4,061,437 2,211,235
---------- ----------
Net Deferred Tax Assets -- 609,849
Deferred Tax Liabilities - Property
and Equipment -- 609,849
---------- ----------
Net Deferred Tax Assets $ -- $ --
========== ==========
At June 30, 1999, the Company had approximately $10.8 million of net operating
loss carryforwards available for use, which expire through 2019. In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the schedule of
reversal of deferred tax assets, projected future taxable income, and tax
planning strategies in making the assessment.
F-13
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 7 - STOCK OPTIONS AND STOCK WARRANTS
During 1999 and 1998, the Company has granted 90,000 and 55,000 nonqualified
stock options, respectively, to certain key employees and directors to purchase
shares of the Company's common stock at a price equal to or in excess of the
market price of the stock, vesting over a five year period. These options were
granted as compensation and the number of options granted was determined based
on specific individual circumstances. The shares issuable under these option
grants are nonregistered shares and the Company has no requirement to register
such shares. The Company does not have a formal stock option plan.
The per share weighted-average fair value of stock options granted was
calculated using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1998 - no expected dividend yield, risk-free
interest rate of 5.6% weighted average expected volatility of 22% and an
expected life of 5 years; 1999 - no expected dividend yield, risk-free interest
rate of 4.9% weighted average expected volatility of 30% and an expected life of
5 years. In addition, for 1999 and 1998 the Company has discounted the market
price of the stock, on the date of option grant, by 35% in consideration of the
restrictions on the sale of the underlying shares. The fair value on the date of
grant for options granted with exercise prices in excess of the market price of
the stock was $0.10 and $0.26 for 1999 and 1998, respectively.
The Company applies APB Opinion No. 25 in accounting for option grants and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net loss would not have been materially impacted for the
effects of such calculation in either 1999 or 1998.
In addition, during 1998 the Company granted 30,000 warrants (valued at $8,203)
to purchase shares of Company common stock to non-employees in return for
services provided in connection with the Company's equity offerings. These
warrants have been recorded at fair value using substantially the same criteria
as discussed above for the stock options. During 1999, the Company granted
345,363 warrants (valued at $46,000) to purchase shares of the Company's common
stock to investors and in return for services provided.
In connection with an equity offering, the Company also issued 148,500 warrants
to purchase shares of Company common stock as described in note 9.
F-14
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 7 - STOCK OPTIONS AND STOCK WARRANTS (concluded)
Stock option and warrant activity during the period indicated is as follows:
Weighted
Number of Average
Shares Exercise Price
Balance at June 30, 1997 Granted 3,015,391 $1.96
- exercise price in excess of
market price of stock 233,500 3.13
Exercised (40,000) 1.51
Canceled (45,000) 2.73
---------- -----
Balance at June 30, 1998 (3,163,891) 2.13
Granted-exercise price in excess
of market price of stock 435,363 0.66
Canceled (280,000) 1.00
---------- -----
Balance at June 30, 1999 3,319,254 $1.30
========== =====
The following table presents information regarding all options and warrants
outstanding at June 30, 1999.
Weighted
Number of Average Weighted
Warrants and Remaining Range of Average
Options Contractual Exercise Exercise
Outstanding Life Prices Price
435,363 4.6 years $0.49 - 1.00 $0.66
1,435,000 3.0 years 1.00 - 1.51 1.05
998,500 3.1 years 1.00 - 3.13 1.28
450,391 2.7 years 1.00 - 3.37 2.72
--------- --------- ------------ -----
3,319,254 2.9 years $1.00 - 3.37 $1.30
========= ========= ============ =====
The following table presents information regarding options and warrants
currently exercisable at June 30, 1999.
Number of Weighted
Warrants and Range of Average
Options Exercise Exercise
Exercisable Prices Price
1,435,000 $1.00 - 1.51 $1.05
721,000 1.00 - 3.13 1.22
402,391 1.00 - 3.37 2.87
--------- ------------ -----
2,558,391 $1.00 - 3.37 $1.38
========= ============ =====
F-15
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is a defendant in one lawsuit with a former development franchisee
alleging wrongful contract termination, among other things. The plaintiff is
seeking damages in excess of $10 million, however the Company believes the claim
is without merit, has counter sued and is defending the claim vigorously. The
case is presently in the U.S. District Court. The Company is involved in various
other claims and legal actions arising in the ordinary course of business. In
the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the Company's consolidated results of
operations or financial position.
NOTE 9 - STOCKHOLDERS' EQUITY
In November and December 1997, the Company consummated a private placement to
investors with respect to equity units consisting of shares of its Series C
Preferred Stock, with warrants to purchase shares of common stock attached, for
aggregate proceeds of $990,000. On November 25, 1997 the Company sold 8,100
shares of Series C Preferred Stock, with warrants to purchase 121,500 shares of
common stock attached. On December 23, 1997, the Company sold 1,800 shares of
Series C Preferred Stock, with warrants to purchase 27,000 shares of common
stock attached. The Company allocated $137,295 of the proceeds to the value of
the warrants and $852,705 to the value of the preferred stock. The preferred
stock is not convertible, but may be redeemed at the option of the Company at a
redemption price of $100 per share plus accrued and unpaid dividends, at any
time after October 31, 1999. The holders of the preferred stock are entitled to
a cumulative dividend of 10 percent per annum, payable semi-annually, if and
when the Board declares a dividend.
At June 30, 1999 and 1998, the Company had accumulated and unpaid dividends of
approximately $102,000 and $56,000 on this series of preferred stock. The
warrants entitle the holder to purchase one share of common stock at an exercise
price of $3.125 per share of common stock. The Company is utilizing the proceeds
for working capital needs.
The holders of the Series A Preferred Stock are entitled to a cumulative
dividend of $0.10 per share per annum. Such dividends accrue annually but are
payable if and when the Company declares a dividend. The Company has not paid
any dividends with respect to the Series A Preferred Stock. The 87,200
outstanding shares of Series A Preferred Stock are convertible into 96,889
shares of Common Stock for no additional consideration at the option of the
holder of the stock. The Series A Preferred Stock is entitled to a liquidation
preference of $1.00 per share, plus any accrued and unpaid dividends. The Series
A Preferred Stock may be redeemed by the Company at a redemption price of $1.00
per share plus all accrued and unpaid dividends. The amount of accumulated and
unpaid dividends was approximately $23,720 at June 30, 1999 and $15,000 at June
30, 1998.
In conjunction with the acquisition of MIE, the former owners of MIE (Magee) and
the Company amended the terms of the Series B Preferred Stock and agreed that no
dividends would accumulate on such preferred stock after November 30, 1996. The
Company also agreed to pay Magee an amount equal to the accrued dividend on the
F-16
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 9 - STOCKHOLDERS' EQUITY (concluded)
Series B Preferred Stock through November 30, 1996 (which was $390,417) in full
on September 1, 1998. In addition, the 490,000 outstanding shares of Series B
Preferred Stock are now allowed to be convertible at the option of the holder or
the Company at any time, and the conversion rate was increased so that Magee
will receive 765,625 shares of common stock upon conversion (an increase of
275,625 shares, valued at $843,413 and included as part of the purchase price of
MIE) for no additional consideration. The Company has not determined when it
will require conversion of the Series B Preferred Stock into common stock.
In addition, the Company issued approximately 34,100 shares of its common stock
during 1998 as part of acquiring restaurants.
During 1999, 10,600 shares of Preferred Stock Series A were converted to common
stock.
NOTE 10 - GOING CONCERN
As shown in the accompanying financial statements, the Company incurred a net
loss of approximately $5,800,000 during the year ended June 30, 1999, and as of
that date, the Company's current liabilities exceeded its current assets by
approximately $3,733,000 and its total liabilities exceeded its total assets by
$3,043,000. Those factors create an uncertainty about the Company's ability to
continue as a going concern.
Management of the Company implemented a corporate restructuring plan to address
the financial condition of the Company in January 1999. The multi-faceted
corporate strategy is focused on the restructuring of real estate obligations,
improving store profitability, franchising and attracting capital or new debt.
Each facet of the strategy is geared to improving profitability by selling
certain Company-owned restaurants that typically incur losses, franchise sales,
cobranding and introducing a retail product line for major supermarket chains.
Upon the completion of the restructuring plan, the Company-owned and operated
restaurants will be concentrated within New York, New Jersey and Pennsylvania.
Existing Arthur Treacher markets in Ohio, Michigan, Maryland, Washington D.C.,
Florida and Ontario, Canada will be targeted for franchise expansion. The
cobranding program with Miami Subs, Nathan's Famous Hot Dogs, Kenny Rogers
Roasters, Pudgies Famous Chicken and other approved quick serve and casual
dining feeders will continue to provide an additional source of franchise
revenue.
As of October 30, 1999, the restructuring of real estate obligations by
franchising, selling and terminating selected leases was complete. As a result
of the spin-off of selected leases, losses typically incurred by certain
locations have been eliminated, thus improving cashflow and profitability. Also,
the Company raised $952,000 in the form of capital and bridge loans from January
1999 to February 4, 2000.
F-17
<PAGE>
ARTHUR TREACHER'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE 11 - SUBSEQUENT EVENTS
Subsequent to June 30, 1999, the Company has issued convertible promissory notes
to related parties in the amount of approximately $660,000. The notes bear
interest at 12% and are payable in October, 2000. Proceeds from the loans were
used for working capital and the notes are unsecured.
F-18
<PAGE>
EXHIBIT 10.19
FORBEARANCE AGREEMENT
THIS 'FORBEARANCE AGREEMENT (the "Agreement") is made this 21st day of
October, 1999, by and among M.I.E. HOSPITALITY, INC., a Pennsylvania corporation
("Borrower"), ARTHUR TREACHER'S, INC., a Utah corporation ("Treacher's") and
MAGEE INDUSTRIAL ENTERPRISES, INC., a Pennsylvania corporation (the "Lender").
REFERENCES TO CAPITALIZED TERMS USED HEREIN ARE SET FORTH IN SECTION 1 HEREOF.
BACKGROUND
A. In connection with the acquisition on or about November 27, 1996 of
the issued and outstanding shares of capital stock of Borrower by Treacher's,
Borrower executed and delivered a Promissory Note dated November 27, 1996, in
the original principal amount of $1,139,563 (the "Note") to the Lender.
B. In order to secure the obligation to repay any liabilities and
obligations of Borrower to the Lender under the Note, reacher's, on or about
November 27, 1996, executed and delivered a Guaranty (the "Suretyship
Agreement"), pursuant to which Treacher's became unlimited surety to the Lender
for the obligations and liabilities of Borrower under the Note.
C. The Borrower and Treacher's have defaulted under the terms of the
Note and Suretyship Agreement for, inter alia, failure to make the principal
payment due June 1, 1999 under the Loan Documents. The foregoing default is
hereinafter referred to as the "Existing Default".
D. On or about June 25, 1999, Lender entered a judgment against
Borrower by confession in the Court of Common Pleas of Philadelphia County,
Pennsylvania in the amount of Nine Hundred Sixty-Four Thousand Two Hundred
Thirty-Six Dollars an&Forty-Four Cents ($964,236.44) in an action entitled Magee
Industrial Enterprises, Inc. v. M.I.E Hospitality, Inc., No. 003040 (the
"Judgment Against Borrower").
E. On or about June 25, 1999, Lender entered a judgment against
Treacher's by confession in the Court of Common Pleas of Philadelphia County,
Pennsylvania in the amount of Nine Hundred Sixty-Four Thousand Two Hundred
Thirty-Six Dollars and Forty-Four Cents ($964,236.~) in action entitled Magee
Industrial Enterprises. Inc. v. Arthur Treacher's. Inc., No. 003035 (the
"Judgment Against Treacher's"). The Judgment Against Borrower and the Judgment
Against Treacher's are hereinafter collectively referred to as the "Judgments".
F. Borrower and Treacher's have requested that Lender refrain from
exercising any rights available to it as a result of the existence of the
Existing Default and to refrain from
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executing upon a Judgment upon the covenant and agreement of Borrower and
Treacher's to make or cause to be made the payments described in this Agreement
and otherwise comply with the terms and provisions of the Loan Documents and the
terms hereof, and which Lender is willing to do pursuant to the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of foregoing premises and intending to
be legally bound hereby, 'the parties hereto agree as follows:
TERMS
1. CAPITALIZED TERMS. For purposes of this Agreement:
(a) "Lender Indebtedness" shall have the meaning set forth in
Section 5 below.
(b) "Code" means the Uniform Commercial Code as adopted in
Pennsylvania, as the same may be amended from time to time.
(c) "Collateral" means all tangible and intangible property of
Obligors, whether real or personal, pledged and/or delivered to Lender or in
which Lender has been granted a lien or security interest, as security for the
Note.
(d) "Forbearance Documents" means the Loan Documents, together
with this Agreement and all other documents executed in connection herewith
including but not limited to the documents listed in Section 7 of this
Agreement.
(e) "Loan Documents" means all documents, agreements,
certifications, resolutions, notes, surety and security agreements executed by
the Obligors and delivered to The Lender in connection with the transactions
referred to herein including, but not limited to the Note and the Suretyship
Agreement.
(f) "Obligors" means the Borrower and Treacher's.
All other capitalized terms used herein shall have the meanings set forth in
this Agreement.
2. CONFIRMATION OF BACKGROUND. Obligors hereby jointly and severally
ratify, confirm and acknowledge that the statements contained in the foregoing
Background are true and complete in all respects and that the Loan Documents are
valid, binding and in full force and effect as of the date hereof and fully
enforceable against Obligors and their respective assets in accordance with the
terms thereof. Treacher's further acknowledges that nothing contained in this
Agreement shall be deemed to impair, reduce or release in any manner whatsoever
any of its obligations as surety for the obligations of Borrower under the Loan
Documents.
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3. GENERAL ACKNOWLEDGMENTS. Obligors hereby acknowledge and agree as
follows:
(a) Borrower and Treacher's are currently in default of their
respective obligations under the Loan Documents as a result of the occurrence of
the Existing Default, and Obligors hereby fully and finally waive any further
notice or demands from Lender to Obligors in connection therewith;
(b) Neither this Agreement nor any other agreement entered in
connection herewith or pursuant to the terms hereof shall be deemed or construed
to be a compromise, satisfaction, reinstatement, accord and satisfaction,
novation or release of any of the Loan Documents, or any rights or obligations,
thereunder, or a waiver by Lender of any of its rights under the Loan Documents
or at law or in equity;
(c) Except as specifically provided herein, neither this
Agreement nor any other agreement executed in connection herewith or pursuant to
the terms hereof, nor any actions taken pursuant to this Agreement or such other
agreement shall be deemed to cure the Existing Default or any other events of
default which m~y exist under the Loan Documents or to be a waiver by the Lender
of the Existing Default or any other existing defaults or events of default
under the Loan Documents, or of any rights or remedies in connection therewith
or with respect thereto, it being the intention of the parties hereto that the
obligations of Obligors with respect to the Loan Documents are and shall remain
in full force and effect;
(d) All liens, security interests, pledges, assignments,
rights and remedies granted to the Lender in the Loan Documents are hereby
renewed, confirmed and continued, and shall also secure the performance by
Obligors of their respective obligations hereunder; and
(e) If at any time a payment or payments made by any Obligor
on any part of the Lender Indebtedness are subsequently invalidated, declared to
be fraudulent or preferential, and are set aside or are required to be repaid to
a trustee, receiver or any other person or entity under any bankruptcy act,
state or federal law, common law or equitable cause, then to the extent of such
payment or payments, the Lender Indebtedness intended to be satisfied shall be
revived and continued in full force and effect as if such payment or payments
had not been made.
4. CHALLENGE TO ENFORCEMENT. Obligors acknowledge and agree that none
of them have any defense, set-off, counterclaim or challenge with respect to the
payment of any sums owing under the Loan Documents, or the enforcement of any of
the terms or conditions thereof, or to the validity or priority of any liens or
encumbrances granted or established therein.
5. CONFIRMATION OF EXISTING INDEBTEDNESS. Obligors hereby confirm and
acknowledge that as of September 24, 1999, (a) the outstanding principal balance
under the Note is $911,650.40; and (b) the aggregate accrued and unpaid interest
due on the Note at' the Default Rate, as defined in the Note, is $75,059.25. The
foregoing sums, together with all accrued and unpaid interest thereon, future
advances, attorneys' fees and expenses and all other
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costs and expenses due or to become due under the Forbearance Documents, shall
be collectively referred to herein as the "Lender Indebtedness".
Obligors hereby acknowledge and agree that all sums described
in this Section 5 are validly and duly owing to Lender.
6. FORBEARANCE. Lender hereby agrees to forbear from exercising the
rights and remedies available to it against the Obligors as a result of the
Existing Default, until the earlier of (a) the occurrence of any default or
event of default (other than the Existing Default) under the Forbearance
Documents, (b) a breach of any of Obligors' obligations hereunder, or (c)
failure of compliance with any conditions precedent as set forth in Section 7
hereof.
7. CONDITIONS PRECEDENT TO LENDER'S OBLIGATION TO FORBEAR. It shall be
a condition precedent to the Lender's obligation to forbear hereunder that
Lender shall have received the sum of $150,827.22 representing the payment of
principal and interest due under the Note on June 1, 1999 as follows:
(a) Lender shall have received the $60,500 security deposit
under the Lease Agreement dated May 15, 1979 between Borrower and Union Deposit
Corporation (the "Security Deposit"'); and
(b) Lender shall have received the sum of $90,327.22 from
Treacher's by wire transfer of immediately available funds on or before October
21, 1999.
8. ADDITIONAL AGREEMENTS OF LENDER AND TREACHER'S.
(a) Provided that no event of default under the Forbearance
Documents, other than the Existing Default has occurred, Lender agrees to accept
common stock of Arthur Treacher's, Inc. (the "Common Stock") at an agreed
exchange price of $.60 per share in lieu of the cash payments of principal and
accrued interest due December 1, 1999 and June 1, 2000 under the Note, or
243,993 shares of Common Stock in lieu of the $146,395.60 principal and interest
payment due December 1, 1999 and 236,269 shares of Common Stock in lieu of the
$141,761.39 'principal and interest payment due June 1, 2000. In the event of a
stock dividend, stock split, or other subdivision, reclassification or
combination of the Common Stock, the exchange price and number of shares of
Common Stock to be received shall be adjusted proportionately. If Treacher's
registers any shares of Common Stock under the Federal Securities Law,
Treacher's shall include in its registration statement all shares of Common
Stock held by Lender at no expense to Lender.
(b) Lender acknowledges that there are various substantial
risks attendant to Treacher's business and it has considered the risks
associated with the purchase and ownership of the Common Stock. No
representations or warranties have been made concerning the success of the
business or the potential profit, if any, of an investment in Leacher's. Lender
has had an opportunity to receive from Treacher's material financial and other
information about the
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Common Stock and Treacher's and Treacher's has given Lender an opportunity to
ask questions about and receive answers respecting the business of Treacher's
and its financial condition. As an owner of Series B Preferred Stock of
Treacher's, Lender has knowledge of its business and industry and is able to
evaluate the merits and risks of ownership of Common Stock.
(c) Lender acknowledges the illiquidity of the Common Stock.
Lender acknowledges tat an investment in the Common Stock is speculative and
involves a risk of loss of the entire investment and no assurance can be given
of any income from such investment. Lender further acknowledges that, due to the
fact that the Common Stock will not be registered under the 1933 Act, or state
securities laws, transfers of the Common Stock have been significantly limited.
Therefore, Lender does not expect to be able to transfer the Common Stock.
Lender acknowledges that Lender must bear the economic risk of the investment
for an indefinite period of time and can afford a complete loss of the
investment and Lender acknowledges that the Common Stock cannot be transferred
without registration or available exemption from registration under applicable
securities laws. Furthermore, Lender understands that (a) the Common Stock will
bear an appropriate legend restricting the sale, hypothecation or other transfer
of the Common Stock, and (1,) the transfer records of Treacher's will contain
appropriate notations of such transfer restrictions.
(d) Lender warrants and represents to Treacher's that it is
acquiring the Common Stock for investment purposes, solely for its own account
and not for fractionalization or with a view toward distribution and has no
contract, agreement, arrangement or undertaking with any person to sell,
transfer or pledge the Common Stock.
9. SURVIVAL OF OBLIGATIONS OF ALL OTHER LOAN DOCUMENTS. All of the
terms, conditions, representations, warranties and covenants of the Loan
Documents, to the extent not inconsistent with the terms hereof, shall remain in
full force and effect unaffected by this Forbearance Agreement. It is intended
that the Loan Documents and this Agreement shall be interpreted in an expansive
way so as to increase the rights, remedies and privileges available to the
Lender and not to diminish them. If any provision of this Agreement or the Loan
Documents is held to be unenforceable, such unenforceability shall not adversely
affect any of the other terms or conditions of the Loan Documents and this
Agreement.
10. ADDITIONAL DOCUMENTS AND FUTURE ACTIONS. Obligors will, at their
sole cost, take such actions and provide Lender from time to time with such
agreements, financing statements and additional instruments, documents or
information as Lender may in its discretion deem necessary or advisable to
perfect, protect, maintain or enforce the security interests in the Collateral,
to permit Lender to protect or enforce its interest in the Collateral, or to
carry out the terms of the Forbearance Documents. Obligors hereby authorize and
appoint Lender as their attorney-in-fact, with full power of substitution, to
take such actions as Lender may deem advisable to protect the Collateral and its
interests thereon and its rights hereunder, to execute on Obligors' behalf and
file at Obligors' expense financing statements, and amendments thereto, in those
public offices deemed necessary or appropriate by Lender to establish, maintain
and protect a continuously perfected security interest in the Collateral, and to
execute on
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Obligors' behalf such other documents and notices as Lender may deem advisable
to protect the Collateral and its interests therein and its rights hereunder.
Such power being coupled with an interest is irrevocable. Obligors irrevocably
authorize the filing of a carbon, photographic or other copy of this Agreement,
or of a financing statement, as a financing statement and agree that such filing
is sufficient as a financing statement.
11. REPRESENTATIONS AND WARRANTIES. In consideration of the forbearance
extended herein by Lender, Obligors hereby represent and warrant, as applicable,
which representations and warranties shall survive until all Lender Indebtedness
and all other obligations of'the Obligors to Lender are paid and satisfied in
full, as follows:
(a) All representations and warranties of Obligors set forth
in the Loan Documents are true and complete in all material respects as of the
date hereof.
(b) No condition or event exists or has occurred which would
constitute an event of default under the Loan Documents (or would, upon the
giving of notice or the passage of time, or both constitute an event of default)
other than the Existing Default.
(c) The execution and delivery of this Agreement by Obligors
and all documents and agreements to be executed and delivered pursuant to the
terms hereof;
(i) has been duly authorized by all requisite corporate
action by Borrower and Treacher's;
(ii) will not conflict with or result in the breach of or
constitute a default (upon the passage of time, delivery of notice or both)
under the Articles of Incorporation or By-Laws of Borrower or Treacher's or any
applicable statute, law, rule, regulation or ordinance or any indenture,
mortgage, loan or other document or agreement to which any Obligor is a party or
by which any of them is bound or affected; or
(iii) will not result in the creation or imposition of any
lien, charge or encumbrance of any nature whatsoever upon any of the property or
assets of any Obligor, except liens in favor of the Lender or as permitted
hereunder or under the Loan Documents.
12. CERTAIN FEES, COSTS, EXPENSES AND EXPENDITURES. Obligors will pay
all of the Lender's expenses in connection with the review, preparation,
negotiation, documentation and closing of this Agreement and the consummation of
the transactions contemplated hereunder, including without limitation, fees,
disbursements, expenses, appraisal costs and fees and expenses of counsel
retained by Lender and all fees related to filings, recording of documents and
searches, whether or not the transactions contemplated hereunder are
consummated. Nothing contained herein shall limit in any manner whatsoever
Lender's right to reimbursement under any of the Forbearance Documents.
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13. DEFAULTS. Occurrence of any one or more of the following shall
constitute a default hereunder and under each of the Loan Documents:
(a) Any default or event of default under any of the
Forbearance Documents, or any event which, with the giving of notice or passage
of time or both, would constitute a default or event of default hereunder or
thereunder; or
(b) The failure of any Obligor to comply with the terms of
this Agreement.
Notwithstanding the foregoing, in no event shall the Existing Default
constitute a default hereunder.
14. REMEDIES. Upon the occurrence of an event of default hereunder, at
the option of Lender, upon the expiration or earlier termination of the
forbearance period provided herein, and without'further notice or demand, which
notice and demand is expressly waived by Obligors, (a) the entire outstanding
Lender Indebtedness shall be immediately due and payable; and/or (b) Lender may
(i) terminate its obligation to forbear hereunder; and (ii) exercise each and
every right and remedy under the Forbearance Documents, at law, in equity or
otherwise.
15. RELEASE AND INDEMNIFICATION. In order to induce Lender to enter
into this Agreement, Obligors hereby agree as follows:
(a) Release. Obligors hereby fully, finally and forever
acquit, quitclaim, release and discharge Lender and its officers, directors,
employees, agents, successors and assigns of and from any and all obligations,
claims, liabilities, damages, demands, debts, liens, deficiencies or cause or
causes of action to, of or for the benefit (whether directly or indirectly) of
Obligors, at law or in equity, known or unknown, contingent or otherwise,
whether asserted or unasserted, whether now known or hereafter discovered,
whether statutory, in contract or in tort, as well as any other kind or
character of action now held, owned or possessed (whether directly or
indirectly) by Obligors on account of, arising out of, related to or concerning,
whether directly or indirectly, proximately or remotely (i) the negotiation,
review, preparation or documentation of the Loan Documents or Forbearance
Documents, (ii) the administration of the obligations evidenced by the
Forbearance Documents; (iii) the enforcement, protection or preservation of
Lender's rights under the Forbearance Documents, and/or (iv) any action or
inaction by Lender in connection with any such documents, instruments and
agreements (the "Released Claims"), from the beginning of the world to the date
hereof.
(b) Covenant Not to Litigate. In addition to the release
contained in Subsection 15(a) above, and not in limitation thereof, Obligors
hereby agree never to prosecute, nor voluntarily aid in the prosecution of, any
action or proceeding relating to the Released Claims, whether by claim,
counterclaim or otherwise.
16. NO COURSE OF DEALING.
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(a) Future Forbearance. Nothing contained herein shall be
deemed to obligate Lender to enter into any other forbearance agreements or to
waive any Events of Default.
17. COMMUNICATIONS AND NOTICES. All notices, requests and other
communications made or given in connection with this Agreement or under the Loan
Documents shall be in writing and, unless receipt is stated herein to be
required, shall be deemed to have been validly given if delivered personally to
the individual or division or department to whose attention notices to a parry
are to be addressed, or by private cagier, telecopy (with original forwarded by
first class mail), or registered or certified mail, return receipt requested, in
all cases with postage prepaid, addressed as follows, until some other address
(or individual or division or department for attention) shall have been
designated by notice given by one party to the other:
To Borrower or Treacher's:
M.I.E. Hospitality, Inc.
7400 Baymeadows Way, Suite 300
Jacksonville, Florida 32256
Attention: William F. Saculla
Telecopy Number: 904-739-2500
With a copy of all notices and communications to Borrower or Treacher's
to:
McLaughlin & Stern, LLP
250 Madison Avenue, 18th Floor
New York, New York 10016
Attention: Steven W. Schuster, Esquire
Telecopy Number: 212-448-0066
To Lender:
Magee Industrial Enterprises. Inc.
480 W. 5th Street
Bloomsburg, Pennsylvania 17815
Attention: Mr. Harry M. Katerman
Telecopy Number: 570-784-5222
With a copy to:
White and Williams LLP
1800 One Liberty Place
Philadelphia, Pennsylvania 19103-7395
Attention: Gary P. Biehn, Esquire
Telecopy Number; 215-864-7123
18. WAIVERS. In connection with any proceedings hereunder or in
connection with any of the Lender Indebtedness, including without limitation any
action by Lender in replevin, foreclosure or other court process or in
connection with any other action related to the Lender Indebtedness or the
transactions contemplated hereunder, each Obligor waives:
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(a) all errors, defects and imperfections in such
proceedings;
(b) all benefits under any present or future laws exempting
any property, real or personal, or any part of any proceeds thereof from
attachment, levy or sale under execution, or providing for any stay of execution
to be issued on any judgment recovered in connection with the Lender
Indebtedness or in any replevin or foreclosure proceeding, or otherwise
providing for any valuation, appraisal or exemption;
(c) all rights to inquisition on any real estate, which real
estate may be levied upon pursuant to a judgment obtained in connection with any
of the Lender Indebtedness and sold upon any writ of execution issued thereon in
whole or in part, in any order desired by Lender;
(d) presentment for payment, demand, notice of demand, notice
of non payment, protest and notice of protest of any of the Lender Indebtedness;
(e) any requirement for bonds, security or sureties required
by statute, court rule or otherwise;
(f) any demand for possession of any collateral prior to
commencement of any Suit;
(g) any right to require or participate in the marshaling of
any Obligor's property;
(h) all benefits under present and future laws permitting
termination of any Surety's obligations by delivery of notice or otherwise; and
(i) all rights to claim or recover attorney's fees and costs
in the event that such Obligor is successful in any action to remove, suspend or
enforce a judgment entered by confession.
19. COMMERCIAL REASONABLENESS. Obligors further agree that any
disposition of collateral by the Lender at any public auction sale performed by
a duly licensed auctioneer, regularly engaged in sale by auction, is a sale in
conformity with reasonably commercial practices, and any disposition of
collateral at such auction sale is a commercially reasonable disposition in
accordance with Section 9-507 of the Code.
20. EXCLUSIVE JURISDICTION. Obligors hereby consent to the exclusive
jurisdiction of any state or federal court located within the Commonwealth of
Pennsylvania, and irrevocably agree that, subject to the Lender's election, all
actions or proceedings relating to the Forbearance Documents or the transactions
contemplated hereunder shall be litigated in such courts, and Obligors waive any
objection which they may have based on improper venue or forum non conveniens to
the conduct of any proceeding in any such court and waive personal service of
any and all process upon them, and consent that all such service of process be
made by
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mail or messenger directed to it them at the address set forth in Section 17 for
Obligors. Nothing contained in this Section 20 shall affect the right of Lender
to serve legal process in any other manner permitted by law or affect the right
of Lender to bring any action or proceeding against any Obligor or their
respective property in the courts of any other jurisdiction.
21. CONSENT TO RELIEF FROM THE AUTOMATIC STAY. Obligors hereby agree
that if, during the forbearance term provided herein, any Obligor shall (i)
file, or be the subject of, any bankruptcy petition filed with any bankruptcy
court of competent jurisdiction, (ii) be the subject of any order for relief
issued under such Title 11 of the U.S. Code, as amended, (iii) file or be the
subject of any petition seeking any reorganization; arrangement, composition,
readjustment, liquidation, dissolution or similar relief for debtors, (iv) seek,
consent to or acquiesce in the appointment of any trustee, receiver, conservator
or liquidator, (v) be the subject of any order, judgment or decree filed against
any Obligor for any reorganization, arrangement, composition, readjustment,
liquidation, dissolution, or similar relief under any present or future federal
or state act or law relating to bankruptcy, insolvency, or other relief for
debtors, the Lender immediately, and without further action by the Lender, shall
be entitled to relief from any automatic stay imposed by section 362 of Title 11
of the U.S. Code, as amended, or from any other stay or suspension of remedies
imposed in any other manner with respect to the exercise of any rights and
remedies by the Lender against its collateral and any proceeds thereof which
otherwise is available to the Lender under Article 9 of the Code or other
applicable state law of any jurisdiction in which any collateral or proceeds may
now or hereafter be located. Obligors hereby irrevocably and unconditionally
waive their right to file any Answer, Objection or Response to any such relief
requested by the Lender and consent to such immediate relief and agrees to take
any and all actions necessary or required of it to entitle the Lender to the
relief provided in this Section 21.
22. CONFESSION OF JUDGMENT. OBLIGORS HEREBY AUTHORIZE AND EMPOWER ANY
ATTORNEY OR THE PROTHONOTARY OR CLERK OF ANY COURT IN THE COMMONWEALTH OF
PENNSYLVANIA, OR IN ANY OTHER JURISDICTION WHICH PERMITS THE ENTRY OF JUDGMENT
BY CONFESSION, TO APPEAR FOR OBLIGORS AT ANY TIME AFTER THE OCCURRENCE OF AN
EVENT OF DEFAULT HEREUNDER OR UNDER ANY OF THE FORBEARANCE DOCUMENTS IN ANY
ACTION BROUGHT AGAINST OBLIGORS HEREUNDER OR UNDER THE FORBEARANCE DOCUMENTS AT
THE SUIT OF LENDER, WITH OR WITHOUT COMPLAINT OR DECLARATION FILED, WITHOUT STAY
OF EXECUTION, AS OF ANY TERM OR TIME, AND THEREIN TO CONFESS OR ENTER JUDGMENT
AGAINST OBLIGORS FOR THE ENTIRE LENDER INDEBTEDNESS TOGETHER WITH AN ATTORNEY'S
COLLECTION COMMISSION OF FIFTEEN PERCENT (15%) OF THE AGGREGATE AMOUNT OF THE
FOREGOING SUMS, BUT IN NO EVENT LESS THAN $5,000.00; AND FOR SO DOING THIS
AGREEMENT OR A COPY HEREOF VERIFIED BY AFFIDAVIT SHALL BE A SUFFICIENT WARRANT.
THE AUTHORITY GRANTED HEREIN TO
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CONFESS JUDGMENT SHALL NOT BE EXHAUSTED BY ANY EXERCISE THEREOF BUT SHALL
CONTINUE FROM TIME TO TIME AND AT ALL TIMES UNTIL PAYMENT IN FULL OF ALL THE
LENDER INDEBTEDNESS.
23. TIME OF ESSENCE. Time is of the essence of this Agreement.
24. INCONSISTENCIES. To the extent of any inconsistency between the
terms and conditions of this Agreement and the terms and conditions of the Loan
Documents, the terms and conditions of this Agreement shall prevail. All terms
and conditions of the Loan Documents not inconsistent herewith shall remain in
full force and effect and tare hereby ratified and confirmed by Obligors.
25. BINDING EFFECT. This Agreement and all rights and powers granted
hereby will bind and inure to the benefit of the parties hereto and their
respective permitted successors and assigns.
26. SEVERABILITY. The provisions of this Agreement and all other
Forbearance Documents are deemed to be severable, and the invalidity or
unenforceability of any provision shall not affect or impair the remaining
provisions which shall continue in full force and effect.
27. NO THIRD PARTY BENEFICIARIES. The rights and benefits of this
Agreement and the Loan Documents shall not inure to the benefit of any third
party.
28. MODIFICATIONS. No modification of this Agreement or any of the
Loan Documents shall be binding or enforceable unless in writing and signed by
or on behalf of the party against whom enforcement is sought.
29. HOLIDAYS. If the day provided herein for the payment of any amount
or the taking of any action falls on a Saturday, Sunday or public holiday at the
place for payment or action, then the due date for such payment or action will
be the next succeeding business day.
30. LAW GOVERNING. This Agreement has been made, executed and
delivered in the Commonwealth of Pennsylvania and will be construed in
accordance with and governed by the laws of such Commonwealth.
31. EXHIBITS AND SCHEDULES. All exhibits and schedules attached hereto
are hereby made a part of this Agreement.
32. HEADINGS. The headings of the Articles, Sections, paragraphs and
clauses of this Agreement are inserted for convenience only and shall not be
deemed to constitute a part of this Agreement.
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33. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
34. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
among the parties hereto concerning the subject matter set forth herein and
supersedes all prior or contemporaneous oral and/or written agreements and
representations not contained herein concerning the subject mailer of this
Agreement.
35. JOINT AND SEVERAL LIABILITY. Obligors hereby acknowledge and
confirm that all agreements, covenants, conditions and provisions of this
Agreement are and shall be the joint and several obligations of each Obligor.
36. WAIVER OF RIGHT TO TRIAL BY JURY. OBLIGORS AND LENDER WAIVE ANY
RIGHT TO TRIAL BY JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a)
ARISING UNDER THIS AGREEMENT OR ANY OTHER DOCUMENT OR INSTRUMENT REFERRED TO
HEREIN OR DELIVERED IN CONNECTION HEREWITH, OR (b) IN ANY WAY CONNECTED WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF ANY OBLIGOR WITH RESPECT TO THIS
AGREEMENT OR ANY OTHER DOCUMENT OR INSTRUMENT REFERRED TO HEREIN OR DELIVERED IN
CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE
WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. OBLIGORS AND LENDER AGREE AND
CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED
BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN
ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF OBLIGORS AND LENDER TO THE WAIVER OF THEIR RIGHT TO
TRIAL BY JURY. OBLIGORS ACKNOWLEDGE THAT THEY HAVE HAD AN OPPORTUNITY TO CONSULT
WITH COUNSEL REGARDING THIS AGREEMENT AND WITH REGARD TO SECTION IN PARTICULAR
AND THAT THEY FULLY UNDERSTAND ITS TERMS, CONTENT AND EFFECT, AND THAT THEY
VOLUNTARILY AND KNOWINGLY AGREE TO THE TERMS OF THIS SECTION.
37. RESULTS OF NEGOTIATION. Obligors acknowledge that they have been
represented by counsel in connection with the execution and delivery of this
Agreement and that the terms and conditions of this Agreement are the result of
negotiation between the parties hereto. Obligors further acknowledge that they
have knowingly (a) waived their right to (i) be heard prior to the entry of a
judgment by confession and understand that, upon such entry, such judgment shall
become a lien on all real property of Obligors in the county where such judgment
is entered; (ii) trial by jury; and (iii) certain other fights as set forth in
detail in Sections 20 and 21 above, and (b) consented to relief from the
automatic stay. Obligors acknowledge that such
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waivers and consents constitute a material inducement for Lender to enter into
this Agreement and they have been fully
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed the day and year first above written.
Attest: M.I.E. HOSPITALITY, INC.
By:
- -------------------------------- --------------------------------
Name: Name:
-------------------------- --------------------------------
Title: Title:
----------------------- --------------------------------
Attest: ARTHUR TREACHER'S, INC.
By:
- -------------------------------- --------------------------------
Name: Name:
-------------------------- --------------------------------
Title: Title:
----------------------- --------------------------------
Attest: MAGEE INDUSTRIAL ENTERPRISES, INC.
By:
- -------------------------------- --------------------------------
Name: Name:
-------------------------- --------------------------------
Title: Title:
----------------------- --------------------------------
13
<PAGE>
EXHIBIT 10.20
ARTHUR TREACHER'S/MIAMI SUBS
DEVELOPMENT PROGRAM
MASTER AGREEMENT
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
1. The Combo Unit...........................................................................................1
2. Term.....................................................................................................2
3. Combo Unit Site and Applicant Approval...................................................................2
4. Individual Franchise Agreement for Each Combo Unit.......................................................3
5. Construction/Conversion Plans for Combo Unit.............................................................3
6. Combo Unit Operations....................................................................................4
7. Training.................................................................................................5
8. Payment of Arthur Treacher's Initial Franchise Fee and Royalty Fee.......................................6
9. Advertising and Marketing................................................................................7
10. Franchise Agreement Modification.........................................................................8
11. Test Units...............................................................................................8
12. Combo Program Exclusivity................................................................................8
13. Franchisee Default.......................................................................................8
14. Franchise Transfer Restrictions..........................................................................9
15. No Assignment............................................................................................9
16. Corporate Authority.....................................................................................10
17. Indemnification.........................................................................................10
18. Default and Termination.................................................................................10
19. Bankruptcy..............................................................................................11
20. Trademarks..............................................................................................11
21. Notices.................................................................................................12
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
22. Complete Agreement and Disclosures......................................................................12
23. Good Faith and Cooperation..............................................................................12
24. Mediation...............................................................................................12
25. Mutual Waiver of a Trial by Jury........................................................................13
26. Severability............................................................................................13
27. Headings................................................................................................13
28. Counterparts............................................................................................13
29. Applicable Law..........................................................................................13
30. Attorneys' Fees.........................................................................................13
31. Confidentiality.........................................................................................13
32. Relationship of the Parties.............................................................................13
33. Waiver..................................................................................................14
34. Injunctive Relief.......................................................................................14
35. Indemnification.........................................................................................14
</TABLE>
<PAGE>
ARTHUR TREACHER'S/MIAMI SUBS
DEVELOPMENT PROGRAM
MASTER AGREEMENT
THIS ARTHUR TREACHER'S/MIAMI SUBS COMBO DEVELOPMENT PROGRAM MASTER
AGREEMENT ("Agreement") is entered into this 13th day of August, 1998 by and
between ARTHUR TREACHER'S, Inc., a Utah corporation ("Arthur Treacher's"), with
its principal place of business at 7400 Baymeadows Way, Suite 300, Jacksonville,
FL 32256, and MIAMI SUBS USA, INC., a Florida corporation ("Miami Subs "), with
its principal place of business at 6300 NW 31st Avenue, Ft. Lauderdale, FL
33309.
RECITALS
A. Arthur Treacher's is engaged in the business of offering and
awarding franchises for the operation of Arthur Trencher's restaurants,
featuring seafood.
B. Miami Subs is in the business of granting single unit franchises and
multiple unit franchise development rights for the operation of restaurants
known as "Miami Subs" and "Miami Subs Grill" (collectively "Restaurants"),
featuring hot and cold submarine and other sandwiches, gyros and other Greek
specialties, hamburgers. salads, and other foods.
C. Miami Subs is a wholly-owned subsidiary of Miami Subs Corporation, a
Florida corporation.
D. Arthur Trencher's and Miami Subs desire to offer certain Arthur
Trencher's products for sale in existing and future developed Miami Subs
Restaurants ("Combo Units") on the terms and conditions as set forth in this
Agreement. The parties intend for this definitive Agreement to supersede the
terms of any previous agreements with the exception of the test agreements, a
copy of which is attached hereto as Exhibit A.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein. Arthur Trencher's and Miami Subs do hereby agree as follows:
1. THE COMBO UNIT. Pursuant to the terms of this Agreement. Arthur
Treacher's agrees to enter into Franchise Agreements with approved Miami Subs
franchisees (or wit Miami Subs for corporate owned Restaurants) permitting the
sale of approved Arthur Treacher's products at existing or new Restaurant
locations.
<PAGE>
2. TERM.
2.1 Term. Unless sooner terminated or modified in accordance with
the provisions herein, this Agreement shall remain in existence for as long as
Miami Subs Units have existing franchise agreements with Arthur Treacher's.
2.2 Continuing Rights. The termination or expiration of this
Agreement shall not affect the term of any Arthur Treacher's Franchise
Agreements awarded by Arthur Treacher's for Combo Units developed (or under
development or approved for development) hereunder prior to or during the term
of this Agreement.
3. COMBO UNIT SITE AND APPLICANT APPROVAL.
3.1 Site and Franchisee Submission. Miami Subs shall submit to
Arthur Treacher's prospective site addresses. prospective franchisee names. and
franchisee's applications. Any proposal requiring Arthur Treacher's approval,
shall be decided by Arthur Treacher's and communicated to Miami Subs within
fifteen (15) days of Arthur Treacher's receipt of the Information. Any approval
not received within the fifteen (15) day approval period shall be deemed
automatically approved.
3.2 Existing Miami Subs Franchisees' Sites. Any and all existing
Miami Subs franchise sites that have been approved by Miami Subs and the
existing franchisee shall both automatically be approved for a Combo Unit by
Arthur Treacher's unless at the time of the proposed addition of Arthur
Treacher's there exists an Arthur Treacher's restaurant within three (3) miles
of the proposed Combo Unit or unless there is an existing Arthur Treacher's
restaurant with a franchise agreement that provides for a larger protected
territory than three (3) miles, in which case, the existing franchise agreement
shall control.
3.3 New Sites/New Franchisees Approved by Miami Subs. Any and all
new Miami Subs franchisees or new sites approved by Miami Subs shall both be
approved by Arthur Treacher's using criteria that shall be no more restrictive
than Miami Subs then current standards. Approval shall not be unreasonably with
held. In addition to the prospective franchisee's names and site addresses for
new franchisees, Miami Subs shall submit to Arthur Treacher's background checks
and any other relevant information (the "Information") obtained by Miami Subs
relating to the prospective franchisee.
3.4 Applicant Documentation by Arthur Treacher's. Upon submission of
the prospective franchisee's name to Arthur Treacher's by Miami Subs. Miami Subs
shall disclose the prospective Combo Unit applicant with the then current Arthur
Treacher's Offering Circular. The Combo Unit applicant shalt be required to
complete and submit an Arthur Treacher's Franchise Applicant form and other
reasonably required information to Arthur Treacher's.
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3.5 Combo Units Operated by Miami Subs. Arthur Treacher's agrees to
award Arthur Treacher's franchises to Miami Subs for Combo Unit locations,
provided that such Combo unit locations shall be operated as company Restaurants
by Miami Subs and there is not an existing Arthur Treacher's restaurant within
three (3) miles of the proposed Combo Unit or there is not an existing Arthur
Treacher's restaurant with a franchise agreement that provides for a larger
protected territory than three (3) miles, in which case, the existing franchise
agreement shall control. The panics shall enter into a mutually acceptable
Master Franchise Agreement for all Combo Units that are operated by Miami Subs.
4. INDIVIDUAL FRANCHISE AGREEMENT FOR EACH COMBO UNIT. The Arthur
Treacher's Franchise Agreement, along with other required franchise related
documents as disclosed in the Arthur Treacher's Offering Circular, must be fully
executed for each individual Combo Unit location before the Combo Unit is
opened. Arthur Treacher's agrees to amend its Franchise Agreement and other
related franchise documents used in connection with this Agreement in order to
reflect the terms of this Agreement and other terms agreed to by both parties.
The parties agree that Arthur Treacher's shall prepare and deliver all such
agreements and related documents (including those for Miami Subs franchisees) to
Miami Subs who will obtain appropriate signatures and collect the required fees
agreed to herein. Miami Subs shall then deliver the fully executed agreements
and all payments back to Arthur Treacher's as soon as reasonably possible after
the Combo Unit opening. It is understood that any and all Arthur Treacher's
Franchise Agreements for such Combo Units shall be independent of this
Agreement. The continued effectiveness of any such individual franchise
agreement shall not depend on the continued effectiveness of this Agreement. If
any conflict shall arise between this Agreement and any individual franchise
agreement, the latter shall have precedence and superiority over the former for
issues pertaining to Arthur Treacher's relationship with individual Miami Subs
franchisees. Conversely, the former shall have precedence and superiority over
the latter for issues pertaining to the Miami Subs/Arthur Treacher's
relationship. Arthur Treacher's acknowledges that the Arthur Treacher's
Franchise Agreement for the Combo Units shall be for a term that runs
concurrently with the Miami Subs Franchise Agreement for each Combo Unit and
terminates upon the termination of the Miami Subs Franchise Agreement. Arthur
Treacher's further acknowledges that Miami Subs has procured financing for the
addition of the Arthur Treacher's operation in each Combo Unit. and in
connection therewith, Arthur Treacher's agrees to modify its Franchise Agreement
to provide for the assignment of the Franchise Agreement to the respective
lender.
5. CONSTRUCTION/CONVERSION PLANS FOR COMBO UNIT. Miami Subs and Arthur
Treacher's shall jointly agree on standard development/conversion guidelines,
necessary' equipment. menu board layout. and any other significant aspects of
the construction or conversion of Miami Subs Restaurants to incorporate the sale
of Arthur Treacher's products. Miami Subs will use reasonable best efforts to
insure that units are convened according to these general guidelines. The Combo
Unit applicant shall pay all costs and expenses necessary to construct and
incorporate Arthur Trencher's into the Restaurant. Nothing herein shall imply
that either Arthur Treacher's or Miami Subs shall be required to
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<PAGE>
estimate or guarantee the expenses of the Combo Unit application or to perform
any act required to be performed by the Combo Unit applicant. The Combo Unit
applicant performing the construction shall procure and maintain all licenses
and permits, and all required landlord or other approvals necessary for the
construction, modification and proposed operations. Whenever a Combo Unit cannot
be developed according to the general guidelines. Miami Subs reserves the right
to modify the plans in their discretion. However, whenever there are material
deviations from the general guidelines, Miami Subs will provide Arthur
Treacher's with information and plans as to the material changes, and Arthur
Treacher's will have the right to approve the changes. Such approval will not be
unreasonably withheld. Combo Units may purchase their equipment from any source,
so long as such equipment meets Arthur Treacher's required specifications.
6. COMBO UNIT OPERATIONS.
6.1 Dual Obligations of Operator. Except for Combo Units operated by
Miami Subs, the parties acknowledge that the Combo Unit operators will be the
franchisee of both parties. The Combo Unit operator as an Arthur Treacher's
franchisee shall be responsible for the sale of approved Arthur Treacher's
products from and the operation of the Combo Unit location in compliance with
the terms of the individual Arthur Treacher's Franchise Agreement and the
standards and requirements of the Arthur Treacher's system. Correspondingly,
Miami Subs or the Miami Subs franchisee shall be responsible for the sale of
Miami Subs products from and the operation of the Restaurant. The Combo Unit
operator shall procure and maintain at its sole expense all licenses and permits
necessary for its operations.
6.2 Obligations of Franchisors.
A. Miami Subs and Arthur Treacher's shall each be responsible
for complying with the federal. state and local laws and regulations governing
their respective relationship with the Combo Units. In addition. Miami Subs and
Arthur Treacher's shall each be responsible for protecting and defending their
own trademark or tradenarne.
B. Arthur Treacher's hereby delegates and assigns -- irrevocably
during the term of each Combo Unit Franchise Agreement with Arthur Treacher's
(or extension or renewal thereof) -- to Miami Subs and Miami Subs agrees to use
reasonable efforts and exercise due care to perform certain of its duties
("Delegated Duties") owed under individual Arthur Treacher's Franchise
Agreements which have been or will be executed between Arthur Treacher's and.
Combo Units owned and operated by Miami Subs franchisees. These Delegated Duties
are limited to the following: (a) initial and on going training, as detailed in
paragraph 8 of this Agreement. (b) operational monitoring and guidance in
accordance with Arthur Trencher's standard operations manual. including any
changes to the manual as agreed to from time to time by Arthur Treacher's and
Miami Subs. (c) architectural and construction supervision, as specified in
Paragraph 5.. and (d) marketing and advertising. Arthur Treacher's shall have
the right to inspect Combo Units and provide Miami Subs with feedback on Miami
Subs' performance of
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these Delegated Duties. If deficiencies are discovered by Arthur Treacher's,
Miami Subs and Arthur Treacher's shall use their best efforts to jointly solve
such problems as soon as reasonably possible. If such deficiencies are not
corrected to Arthur Treacher's reasonable satisfaction, then Arthur Treacher's
shall have the right to directly assist the franchise owner in correcting the
deficiency.
All other duties and responsibilities of Arthur Treacher's
pursuant to its franchise agreements executed with Miami Subs franchisees, which
are not Delegated Duties, shall remain the sole duties of Arthur Treacher's.
Arthur Treacher's agrees to modify (through an Addendum acceptable to Miami
Subs) its Franchise Agreements executed with Miami Subs franchisees, to conform
to the terms agreed to in this Agreement. Arthur Treacher's and Miami Subs shall
concurrently provide each other with copies of all related formal notices issued
to the Combo Unit franchisees. Upon request, Miami Subs shall provide Arthur
Treacher's with copies of its inspection reports of the Combo Units.
6.3 Approval of Products. It is intended that the only approved
seafood products to be offered at the Combo Units shall be Arthur Treacher's
seafood products approved pursuant to this Agreement. Miami Subs and Arthur
Treacher's will jointly agree on the Arthur Treacher's products to be offered
for sale in the Combo Units, and any proposed variations to the agreed upon
menu. In addition, Arthur Treacher's recognizes that Miami Subs Restaurants
purchase food and products through approved national distributors. Arthur
Treacher's will assist Miami Subs in arranging for all necessary products to be
distributed through Miami Subs approved distributors including instructing
Arthur Treacher's approved suppliers to sell directly to Miami Subs approved
distributors. In the event that Miami Subs' distributors distribute Arthur
Treacher's products to an unapproved Miami Subs franchisee, Miami Subs will take
whatever action is necessary and appropriate to have the distributor cease such
shipments.
7. TRAINING.
7.1 Arthur Treacher's Certification of Miami Subs Trainers. Arthur
Treacher's agrees to certify, and keep certified, no fewer than three (3) Miami
Subs operations/training employees as Arthur Treacher's Combo Trainers. Arthur
Treacher's will be responsible for the development of the training curriculum to
be utilized by these Combo Trainers. Arthur Treacher's agrees to keep the
designated Miami Subs Combo Trainers updated, on a periodic basis, with any
significant developments or modifications to the training methods or materials
that will be made available to the Combo Trainees. Arthur Treacher's retains the
rights and authority to modify the Arthur Treacher's training curriculum as it
deems necessary.
7.2 Miami Subs' Instruction of Combo Unit Trainees. Each approved
Arthur Treacher's Combo Franchisee and/or its designated manager shell be
required to attend and successfully complete the Miami Subs training program.
which shall include the above referenced Arthur Treacher's curriculum. The
training will take place at locations as specified by Miami Subs, with sessions
also held at Combo Units approved by Miami Subs. The Franchisee
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<PAGE>
shall be solely responsible for all travel and training-related expenses for
itself and/or designated manager(s).
Miami Subs, through its certified Combo Trainers, shall be
responsible for instructing Combo Unit Trainees in accordance with Arthur
Treacher's approved training curriculum. The Arthur Treacher's training
curriculum may be held separately or it may be incorporated into the regular
Miami Subs training sessions that are taking place.
Arthur Treacher's training instructors shall be allowed, at
their own expense, to audit and observe these training sessions. As a result of
any audited sessions, Arthur Treacher's agrees to provide helpful feedback,
assessments and guidance directly to Miami Subs Combo Trainers who, in turn.
shall communicate any appropriate information directly to the Combo Trainees. If
significant training deficiencies are discovered by Arthur Treacher's, the
parties shall use their reasonable efforts to jointly solve such problems as
soon as practical.
7.3 As requested by Miami Subs, Arthur Treacher's agrees to provide
employees to assist in the opening of each Combo Unit. The number of Arthur
Treacher s employees necessary for each opening shall be agreed by Miami Subs
and Arthur Treacher's.
8. PAYMENT OF ARTHUR TREACHER'S INITIAL FRANCHISE FEE AND ROYALTY FEE.
8.1 Initial Franchise Fees and Opening Costs. An initial franchise
fee associated with entering into an Arthur Treacher's Franchise Agreement under
this program shall be in an amount of Five Thousand Dollars ($5,000.00). Miami
Subs will collect the franchise fee from the Combo Unit franchisee and will
remit one-half of the fee collected (i.e. $2,500.00) to Arthur Treacher's within
15 days following collection. There shall be no separate franchise fee due to
Arthur Treacher's for Miami Subs company operated Combo Restaurants. however,
Miami Subs shall reimburse Arthur Treacher's for approved direct out of pocket
expenses incurred by Arthur Treacher's in participating in the unit opening. The
initial franchise fee shall only increase if jointly agreed upon.
8.2 Royalty Fees. Combo Unit franchisees shall be required to pay to
Miami Subs a royalty of four percent (4%) of the Combo Unit's gross revenue (as
defined in the Miami Subs Franchise Agreement "Gross Revenue"). The Combo Unit
franchise shall not be required to pay a separate royalty to Arthur Treacher's.
After receipt of the 4% royalty fee. Miami Subs shall remit the applicable
portion of such fees collected, as specified below, to Arthur Treacher's on a
monthly basis within ten (10) days following the month that the fee was
collected. Miami Subs shall also provide Arthur Treacher's with an accounting,
on a monthly basis. of all sales at the Combo Unit. the amount of the fees
collected and uncollected, and the computation of the amount remitted to Arthur
Treacher's.
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8.3 Royalty Fees for Existing Restaurants. For existing Miami Subs
Restaurants, Miami Subs shall determine from independent information provided by
the franchisee (including sales tax reports, register tapes, etc. which will be
provided to Arthur Treacher's), the average monthly sales for the Restaurant for
the twelve (12) month period prior to the selling of Arthur Treacher's products
in the Restaurant (the "Base Sales Amount"). Should any Miami Subs Restaurant
have less than a twelve (12) month sales history but at least a six (6) month
sales history, then the Base Sales Amount shall be calculated from the average
monthly sales throughout the Restaurant's history of operation. Miami Subs shall
then remit to Arthur Treacher's following full collection of the entire royalty
fee from the franchisee for each month, a fee of two percent (2%) of the
existing franchised Restaurant's monthly net incremental sales over the Base
Sales Amount, with such amount not to exceed 2% of the amount of Arthur
Treacher's product sales (i.e. assuming that the Base Sales Amount is $80,000;
and Combo Unit monthly sales are $100,000 comprised of $75,000 for Miami Subs
and $25,000 for Arthur Treacher's, then Miami Subs would remit to Arthur
Treacher's from the total royalty fee paid, a fee of 2% of $20,000, or 2% of
that portion of sales that exceeds the Base Sales Amount, not to exceed the
actual Arthur Treacher's sales). For Miami Subs company operated restaurants,
the calculation for royalties shall be the same as for existing franchisee owned
and operated Restaurants except that the percentage shall be changed from two
percent (2%) to one and a half percent (1.5%).
8.4 Newly Developed Restaurants Royalty Fees. For existing Miami
Subs franchisees who are opening a new restaurant site and new company operated
restaurants that incorporate Arthur Treacher's product sales in the Restaurant.
(i.e. units that do not have at least a six (6) month sales history prior to
implementing Arthur Treacher's products for sale in the Restaurant), then Miami
Subs will remit to Arthur Treacher's a fee of one and a half percent (1.5%) of
the total Arthur Treacher's Gross Revenue in the Restaurant on a monthly basis
within ten (10) days following the month that the entire royalty fee is
collected from the franchisee or in which the company-operated Restaurants
collect the revenues.
8.5 New Franchisees Royalty Fees. For any prospective franchisee to
the Miami Subs System, whose principle(s) are not currently a franchisee with
the Miami Subs System, Miami Subs shall remit to Arthur Treacher's a royalty fee
in an amount to be determined by the mutual agreement of both Arthur Treacher's
and Miami Subs.
9. ADVERTISING AND MARKETING. Both Miami Subs and Arthur Treacher's
agree to jointly and independently develop advertising and marketing strategies
for the Combo Units. Miami Subs shall have the right to develop advertising and
promotional material specifically and solely for use in Miami Subs Combo Units,
and will confer with and seek advise from Arthur Treacher's on the development
of such materials; however, Miami Subs need not acquire Arthur Treacher's
approval prior to the use of any marketing or advertising materials. For any
advertising or marketing promotion developed by one party but used in the other
parties' non-Combo Units, such cost incurred by the developing party shall be
shared on a pro-rata basis with the non- developing party. The Combo Units shall
not be required to pay a separate
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advertising fee to Arthur Treacher's. However, Arthur Treacher's will make
available to all Combo Unit franchisees all marketing materials that are made
available to other Arthur Treacher's Restaurants. The pi-ice of these materials
shall not to exceed the cost charged other Arthur Treacher's
Restaurants/franchisees. The Combo Unit franchisee shall only be required to pay
to Miami Subs the advertising fees set forth in the Miami Subs Franchise
Agreement. and Miami Subs shall use such fees in its sole discretion.
Upon the development and operation of a sufficient number of
Combo Units in a designated market, Miami Subs shall use its best efforts to
cause its Combo Unit franchisees in such market to participate in a special
co-op marketing fund for the purpose of marketing and advertising the sale of
Arthur Treacher's products in the market.
10. FRANCHISE AGREEMENT MODIFICATION. Neither Arthur Treacher's or
Miami Subs shall modify or amend the terms of its Franchise Agreement with a
Combo Unit franchisee in any way that would adversely affect the other parties
agreement with the franchisee, without the other parties' prior 'written
approval.
11. TEST UNITS. There are currently three Miami Subs/Arthur Treacher's
test units which are operating under letter agreements (attached as Exhibit A
hereto). Upon termination or expiration of the test agreements, Arthur
Treacher's shall provide the owner/operator with the approved Arthur Treacher's
franchise agreement for use with this program. There will be no initial
franchise fee charged. Following execution of the Franchise Agreement, the terms
of this Agreement shall become effective.
12. COMBO PROGRAM EXCLUSIVITY. Arthur Treacher's recognizes that Miami
Subs co-brands with other concepts (including Baskin-Robbins and Kenny Rogers)
and plans to expand this program to other co-branding partners. However, Miami
Subs agrees that during the term of this Agreement that it will not co-brand
with any other fast food concept that specializes primarily in seafood products
and Arthur Treacher's agrees that it will not co-brand or license its products
with any other company that competes as a fast-food restaurant in the n markets
of Florida, Georgia, North Carolina, South Carolina, Dallas/Fort Worth-Texas
ADI, Peru, Ecuador. or any other ADI (advertising area of dominant influence),
state or country in which Miami Subs develops a presence, unless approved by
Miami Subs. To maintain this exclusivity in North and South Carolina and the
Dallas/Ft. Worth markets, Miami Subs agrees to convert at least six (6) Miami
Subs Restaurants in the Dallas/Ft. Worth A.D.I. ("DFW") to Combo Units within
two (2) years from the date of this Agreement. At least three (3) of the six (6)
DEW Combo Units shall be converted within one (1) year from the date of this
Agreement. In addition, Miami Subs agrees to convert at least six (6) Miami Subs
Restaurants in the North Carolina and South Carolina ("Carolina") market to
Combo Units within two (2) years from the date of this Agreement. At least three
(3) of the six (6) Carolina Combo Units shall be convened within one (1) year
from the date of this Agreement. Should Miami Subs fail to meet the above
conversion schedule for either the DEW market or the Carolina market, Miami Subs
shall lose its
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right to exclusivity for the violated conversion schedule market or markets.
Nothing in this provision shall limit Arthur Treacher's ability to sell
franchises or develop Arthur Treacher's units in any area not otherwise
protected by a Combo Unit's Arthur Treacher's Franchise Agreement.
13. FRANCHISEE DEFAULT.
13.1 Notice of Default and/or Termination of Arthur Treacher's
Agreement.
A. To Combo Units Operated by Miami Subs ("Company-Operated
Combo").
Arthur Treacher's reserves the right to default Miami Subs
in accordance with Arthur Treacher's Agreement upon Miami Subs' breach of the
Arthur Treacher's Franchise Agreement for a Company-Operated Combo. Arthur
Treacher's shall not terminate the Arthur Treacher's Franchise Agreement for a
Company-Operated Combo Unit without first providing Miami Subs (i) written
notification of the relevant material breach, and (ii) a cure period as required
under the Arthur Treacher's Master Franchise Agreement or applicable state law.
B. To Combo Units Owned and Operated by a Miami Subs
franchisee ("MS Franchisee Combo").
Arthur Treacher's reserves the right to default the Combo
Unit franchisee in accordance with the Arthur Treacher's Franchise Agreement.
Arthur Treacher's shall not terminate the Arthur Treacher's Franchise Agreement
for the MS Franchisee Combo without first providing the Combo Unit franchisee
(i) written notice, with a copy to Miami Subs, of the relevant material breach.
and (ii) a cure period, as required under the Arthur Treacher's Franchise
Agreement or applicable state law. If the Combo Unit Franchisee fails to cure
the default under 'the Arthur Treacher's Franchise Agreement within the
prescribed period, Arthur Treacher's shall afford Miami Subs an additional
thirty (30) day period to work out the default with the Combo Unit franchisee or
to have the default cured by Miami Subs itself If such default is an automatic
default under the Arthur Treacher's franchise agreement, the Arthur Treacher's
franchise agreement shall automatically transfer to Miami Subs upon the
termination of the initial franchisee's franchise agreement upon request by
Miami Subs.
13.2 Cross Default. Both Arthur Treacher's and Miami Subs
shall amend their respective Franchise Agreements to provide for an automatic
default and termination of their respective Franchise Agreement upon the default
and termination of either parties' Franchise Agreement.
14. FRANCHISE TRANSFER RESTRICTIONS. Miami Subs will notify Arthur
Treacher's of any transfers of Miami Subs Restaurants (Company-Owned and
franchisee-owned)
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which are Combo Units. Within five (5) days from notification from Miami Subs,
Arthur Treacher's shall, process all necessary Arthur Treacher's documentation
in connection with such transfers. Upon transfer of the restaurant, Miami Subs
shall collect and remit to Arthur Treacher's a transfer fee of Five Hundred
Dollars ($500.00). No transfer fee shall be charged for the transfer of a
Company-Owned Combo Unit. Miami Subs shall be responsible for coordinating the
closing and forwarding all required documents to Arthur Treacher's.
15. NO ASSIGNMENT. Except in connection with a sale of substantially
all the assets, merger or reorganization of either party, this Agreement will
not be assigned by either party without the prior written consent of the other
party, nor may any rights under this Agreement be transferred to any other party
by operation of law. Any such prohibited assignment or transfer will be void and
of no effect and will constitute a material breach of this Agreement.
16. CORPORATE AUTHORITY. Miami Subs and Arthur Treacher's have the
corporate power and authority to execute, deliver and perform this Agreement;
and the execution, delivery and performance of this Agreement has been duly
authorized by all necessary corporate action. The execution, delivery and
performance of this Agreement by Miami Subs and by Arthur Treacher's will not
result in a breach of or violation by Miami Subs or by Arthur Treacher's, or
constitute a default by it, under any judgement, decree, order, governmental
permit or license, agreement, indenture, instrument, statute, rule or regulation
to which either is a party or by which either is bound or their respective
certificate of incorporation or By-Laws. No authorization, approval or consent
of any governmental authority is required in connection with the execution,
delivery and performance by Miami Subs or by Arthur Treacher's of this
Agreement.
17. INDEMNIFICATION. To the extent that Arthur Treacher's or Miami Subs
incurs or has imposed upon it any costs for any claim, damage, liability, suit
or action, including all reasonable expenses and attorneys' fees, by reason of
the acts or omissions of the other, the other's specific business operation, or
of the other's respective agents or employees, Arthur Treacher's and Miami Subs
shall indemnify and hold each other harmless from and against such costs.
18. DEFAULT AND TERMINATION.
18.1 Default Without Opportunity to Cure. The specified party shall
be deemed to be in default under this Agreement upon the occurrence of any of
the following events, and the non-breaching party may, at its option where
allowed by applicable law, terminate this Agreement without affording the other
any opportunity to cure the default, effective immediately upon written notice
from the non-breaching party:
A. If. contrary to the terms of this Agreement, either party
discloses or divulges trade secrets provided to the other to the material
detriment of the non-breaching party;
B. If either party files a petition commencing a voluntary
case under
13
<PAGE>
bankruptcy or other debtor relief laws, an order for relief under bankruptcy or
other debtor relief laws is entered against said party, or said party admits in
writing its inability to pay its debts as they mature or makes an assignment for
the benefit of creditors, or the date a receiver for the property or affairs of
said party is appointed.
18.2 Default With Opportunity to Cure. Except as otherwise provided
in this Section, upon default or breach of this Agreement by either party which
is susceptible of being cured, the non-breaching party may terminate this
Agreement only by giving the breaching party written notice of termination
stating the nature of such default at least thirty (30) days prior to the
effective date of termination; provided, however, that the breaching party may
avoid termination by immediately initiating a remedy to cure such default and
curing it to the non-breaching party's reasonable satisfaction within the thirty
(30) day period, and by promptly providing proof thereof to the non-breaching
party.
18.3 Mutual Agreement. This Agreement may be terminated at any time
by the mutual agreement of Miami Subs and Arthur Treacher's.
19. BANKRUPTCY. If Arthur Treacher's files for bankruptcy, Arthur
Treacher's desires that Miami Subs continue to use the Arthur Treacher's
trademarks. recipes, operational procedures, and other items necessary to
continue to develop and operate the Combo Units. Miami Subs shall retain the
same rights that other Arthur Treacher's franchisees have during any pending
bankruptcy, including the right to order from Arthur Treacher's suppliers.
20. TRADEMARKS.
20.1 Ownership of Names.. Arthur Treacher's and Miami Subs
acknowledge that each party owns trademarks, service marks, and the names and
logos used in connection with its respective company, whether or not trademarked
or copyrighted by each party (collectively "Names") and all goodwill associated
with or symbolized by the Names.
20.2 No Challenge of Names. Neither Arthur Treacher's nor
Miami Subs shall do anything inconsistent with the other party's ownership of
its Names and related goodwill, including any goodwill which might be deemed to
have arisen through the activities of the party which is not the owner of the
Names, and all use of the Names will inure directly and exclusively to the
benefit of the respective owner. Nothing in this Agreement will be deemed to
constitute or result in an assignment of any of the Names or the creation of any
equitable or other interest in them. except as expressly set forth herein.
During the term of this Agreement and any time thereafter, neither party will
impugn, challenge or assist in any challenge to the validity of the other's
Names. the registrations or the ownership thereof. The owner of each respective
Name will be solely responsible for taking such actions as it deems appropriate
to obtain trademark, service mark or copyright registration for, and to defend
its ownership of each Name. All rights with respect to the Names not
specifically granted in this Agreement will be and are hereby
14
<PAGE>
reserved to the owner. Any advertising or promotional materials created for
Miami Subs shall remain the property of Miami Subs with the exception of the
Name.
20.3 Separate Names. Neither Arthur Treacher's nor Miami Subs
shall use, as part of its corporate or other business name, any Name of each
other or any form or variation thereof which is likely to cause third parties to
be confused or mistaken that Miami Subs and Arthur Treacher's are hot separate
entities.
20.4 Grant of License to Miami Subs. Arthur Treacher's hereby
grants to Miami Subs a non-transferable right to use Arthur Treacher's Names
during the term of this Agreement in connection with Miami Subs sale of Miami
Subs franchises and with the marketing, sale and distribution, as set forth
herein, of Arthur Treacher's products at the Combo Unit locations.
21. NOTICES. Any notice or other communication provided for herein or
given hereunder to a party hereto shall be in writing and shall be deemed to
have been given if signed by the party giving them. Notice shall be deemed
effectively given when delivered by hand, on the third business day after it is
deposited in the Untied States mail, postage paid (registered or certified mail)
or on the business day after it is sent by telecopier to the individuals listed
below:
To Arthur Treacher's: Mr. William Saculla. President
Arthur Treacher's, Inc.
7400 Baymeadows Way, Suite 300
Jacksonville, FL 32256
To Miami Subs: Donald L. Perlyn, President
Miami Subs USA, Inc.
6300 NW 3 1st Avenue
Ft. Lauderdale, FL 33309
or such other address with respect to a party as such party shall notify the
other in writing as above provided.
22. COMPLETE AGREEMENT AND DISCLOSURES.
22.1 This Agreement and the Exhibits herein contain the complete
agreement among the parties with respect to the Program contemplated hereby and
supersede all prior agreements and understandings among the parties with respect
to such Program. There are no restrictions, promises, warranties. covenants, or
undertakings by the parties other than those expressly set forth in this
Agreement. This Agreement may be amended, modified or terminated only by written
instrument signed by all parties hereto.
23. GOOD FAITH AND COOPERATION. The parties pledge to utilize their
best
15
<PAGE>
efforts to promote a cooperative working relationship and to undertake a good
faith approach toward resolving any disputes that may arise between themselves
during their relationship
24. MEDIATION. In connection with any dispute which may arise between
the parties, either party may at any time elect to submit the dispute to
non-binding mediation before and in accordance with the procedural rules of a
mutually agreeable mediator. Mediation will take place in a mutually agreeable
place, with the costs of mediation to be borne equally by both parties.
25. MUTUAL WAIVER OF A TRAIL BY JURY. Each party hereby covenants and
agree that in any litigation, suit, action, counterclaim or proceeding, whether
at law or in. equity, which arises out of. concerns, or relates to this
agreement, any and all transactions contemplated hereunder, the performance
thereof, or otherwise, trial should be to a court of competent jurisdiction and
not to a jury. Each party hereby irrevocably waives any right it may have to a
trial by jury. Any party may file an original counterpart or a copy of this
Agreement with any court as written evidence of consent of the parties hereto of
the waiver of their right to trial by jury. Neither party has made or relied
upon any oral representations to or by the other party regarding the
enforceability of the provision. Each party has read and understands the effect
of this jury waiver provision. If any other term of this Agreement is found or
determined to be unconscionable or unenforceable for any reason, the foregoing
provisions shall continue in $11 force and effect
26. SEVERABILITY. If any provision of this Agreement or any Exhibit
shall be determined to be contrary to law and unenforceable by any court of law,
the remaining provisions shall be severable and enforceable in accordance with
their terms.
27. HEADINGS. The descriptive headings of the Sections and Subsections
hereof are inserted for convenience only and do not constitute a part of this
Agreement.
28. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute but one instrument.
29. APPLICABLE LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Florida.
30. ATTORNEYS' FEES. Should suit be brought to enforce this Agreement
or by reason of any claimed default in the performance hereof by either party,
the prevailing party in such suit shall be awarded reasonable attorneys' fees in
the defense or prosecution thereof as a part of the judgement in such suit.
31. CONFIDENTIALITY. Each of the parties shall use its best efforts to
keep confidential any and all information, including but not limited to the
information and materials
16
<PAGE>
contained in the operating guide of the respective party, furnished to it or to
its affiliates, agents or representatives in connection with the Program arising
out of this Agreement. Such parties shall instruct their respective officers,
employees and other representative having access to such information of such
obligation of confidentially and shall enforce adherence to such obligation of
confidentiality. The parties hereby acknowledge that such confidential
information of each party constitutes trade secret. Upon any termination of this
Agreement. the parties shall promptly return to the other all confidential
materials.
32. RELATIONSHIP OF THE PARTIES. It is understood and agreed by the
parties tat this Agreement does not in any way create a fiduciary relationship,
and that nothing in the Agreement is intended to constitute any party as an
agent, legal representative, subsidiary, joint venturer, partner, employee or
servant of the other party, for any purposes whatsoever.
33. WAIVER. No failure of Arthur Treacher's or Miami Subs to exercise
any power reserved to it hereunder, or to insist upon strict compliance by the
other with any obligation or condition hereunder, and no custom or practice of
the parties in variance with the terms thereof, shall constitute a waiver of
Arthur Treacher's or Miami Subs' right to demand strict compliance with the
terms hereof Waiver by Arthur Treacher's or Miami Subs of any particular default
by the other shall not affect or impair Miami Subs' or Arthur Treacher's right
with respect to any subsequent default of the same or of a different nature; not
shall any delay, waiver, forbearance or omission of Miami Subs to exercise any
power or rights arising out of any breach or default by the other of any of the
terms, provisions or covenants hereof or impair Miami Subs' or Arthur Treacher's
rights, nor shall such constitute a waiver by Miami Subs or Arthur Treacher's of
any right hereunder or of the right to declare any subsequent breach or default.
34. INJUNCTIVE RELIEF. Both parties recognize that their failure to
comply with Section 31. of this Agreement or their infringement of the other
parties Names is likely to cause irreparable harm to the other party. Therefore
both parties shall be entitled to injunctive relief (both preliminary and
permanent) restraining that breach and/or to specific performance, without
showing or proving actual damages and without posting any bond or security. Any
equitable remedies sought by the damaged party shall be in addition to, and not
in lieu of, all remedies and rights that the damaged party otherwise may have
arising under applicable law or by virtue of any breach of this Agreement.
35. INDEMNIFICATION. Miami Subs hereby and forever indemnifies, defends
and holds Arthur Treacher's its agents, officers and directors and employees,
harmless from and against any and all obligations, actions. causes of action,
suits, debts, dues, sums of money including attorneys fees, court costs of any
kind and any level whatsoever including appeals, covenants, judgements, executed
claims, demands whatsoever in law or in equity, for, upon or by reason of any
matter arising from or related to the sales process for a Combo Unit.
Notwithstanding the foregoing, Miami Subs shall not indemnify Arthur Treacher's
for matters arising from or related to any deficiency or mistake made to any
offering circular, agreements. or sales information created by or on behalf of
Arthur Treacher's.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
ARTHUR TREACHER'S, INC. MIAMI SUBS USA, INC.
A Utah corporation A Florida corporation
By: /s/William Saculla By:
------------------------------- --------------------------
Its: Pres. Its: President
Attest: Attest:
- ----------------------------------- ------------------------------
Its: Executive Assistant Its: V.P.
18
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<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 165
<SECURITIES> 0
<RECEIVABLES> 149
<ALLOWANCES> 0
<INVENTORY> 175
<CURRENT-ASSETS> 584
<PP&E> 7016
<DEPRECIATION> 5450
<TOTAL-ASSETS> 2641
<CURRENT-LIABILITIES> 4317
<BONDS> 0
0
1745
<COMMON> 152
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2641
<SALES> 20,567
<TOTAL-REVENUES> 21,532
<CGS> 12,855
<TOTAL-COSTS> 26,571
<OTHER-EXPENSES> 639
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 169
<INCOME-PRETAX> (5,846)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,846)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,846)
<EPS-BASIC> (.40)
<EPS-DILUTED> (.40)
</TABLE>
